QUARTERLY NEWSLETTER
733 THIRD AVENUE, NEW YORK, NY 10017 WWW.ROSENBERGESTIS.COM 212-867-6000
“
The last year has been extraordinary a time of unprecedented challenges, stresses and uncertainties. Along with the difficulties surrounding a rapid shift to remote working, we encountered an onslaught of health concerns, childcare pressures and economic hardships for which no one could have prepared. Despite these trials, our attorneys and staff showed unwavering personal and professional commitment to both the firm and our clients. While we anticipate distress to continue in 2021, we already see an end to this crisis. Rosenberg & Estis, P.C. has the knowledge, skills and experience to help you navigate, restructure and re-engage the real estate sector while New York City recovers from this trying season. Thank you for your continued trust as we guide you through a new year filled with a hoped-for return to normalcy, healing and success.�
Gary M. Rosenberg President & Chairman Of The Board Of Directors
Contents Feature Story
4
R&E Member John D. Giampolo stresses the importance for landlords to actively protect their interests in a tenant’s bankruptcy to maximize recovery
Rosenberg & Estis Attorneys in the News
6
R&E attorneys have been a primary resource for publications like The Wall Street Journal, POLITICO, Commercial Observer and others as New York City Real Estate continues to navigate the changes and challenges brought by COVID-19
Recent Publications
8
Works by our attorneys published in the New York Law Journal, Law360 and Real Estate Weekly
Press Releases
18
A glimpse at some of the most powerful, industry-wide decisions since the start of 2020
R&E’s Award-Winning Attorneys
24
Recognized by Crain’s, Martindale-Hubbell and more
Recent Events R&E was invited to speak on webinar panels hosted by leading real estate groups
27
4
Landlords Must Actively Protect Their Interests In A Tenant’s Bankruptcy To Maximize Recovery R&E EXCLUSIVE FEATURE STORY by John D. Giampolo February 4, 2021
As a growing number of retailers and other commercial tenants become distressed, landlords need to evaluate how best to respond. One thing is clear, once the tenant files bankruptcy, the landlord must actively protect its interests in the bankruptcy proceeding in order to maximize recovery. The need for landlords to actively protect their interests in a tenant’s bankruptcy was highlighted in a recent decision from Judge James Garrity, Jr. of the Bankruptcy Court for the Southern District of New York in the case of Flywheel Sports Parent, Inc., et al,1 a national fitness studio chain that filed for Chapter 7. In a case of first impression, a victory was secured but only for those landlords that actively protected their interests by prosecuting objections to the Chapter 7 Trustee’s request for leases be rejected retroactively. On November 5, 2020, the Chapter 7 Trustee for Flywheel, Angela Tese-Milner, filed an application seeking an order authorizing rejection of leases for space that housed studios, offices as well as an apartment, and for the abandonment of remaining inventory and certain other personal property. The Trustee’s application requested that the lease rejection be effective retroactive to the filing of Flywheel’s bankruptcy petition on September 14, 2020. While six landlords actively filed and prosecuted
objections to the Trustee’s request, the remaining landlords did not. The objecting landlords contended that the lease rejection cannot be effective until the date when a bankruptcy trustee or debtor-in-possession surrenders possession of the leased premises. Objecting landlords further contended that until the leases are rejected under the Bankruptcy Code and the leased premises are surrendered, the landlords are entitled to post-bankruptcy rent, additional rent and other charges allowed under their leases which amounts are to be paid to the landlords as priority administrative expense claims under Bankruptcy Code section 365(d)(3), as opposed to the nonpriority status provided for rent arrears accrued before the bankruptcy. The court granted the Trustee’s application to reject landlords’ leases and denied the request to reject the leases retroactively to the bankruptcy filing date – but the court limited this protection to only those landlords that filed and prosecuted objections to the Trustee’s request. Judge Garrity ruled that objecting landlords are permitted to file priority administrative expense claims “for rent accrued under the leases up to and including the date of the hearing on [the Trustee’s] motion which was December 1st, 2020.” This decision in Flywheel shows the benefit of representation by counsel to actively protect landlords’
5
John Giampolo Member
interests in a tenant’s bankruptcy proceeding and the pitfalls of failing to do so. Here, landlords who failed to file and prosecute objections to the Trustee’s request had their leases rejected retroactively with a significant loss of revenue. Rosenberg & Estis, P.C. is now even more poised to provide such representation to clients in bankruptcy matters having expanded its Reorganization & Bankruptcy Department with the addition of new member John Giampolo to lead the practice with Jack Rose. Members of the firm’s Reorganization & Bankruptcy Department are experienced in representing Chapter 11 debtors, committees, landlords and various other creditors and parties in interest in core bankruptcy proceedings under Chapter 11, Chapter 7 and Subchapter V as well as bankruptcy-related matters such as distressed real estate and other asset sales, in-court and out-of-court restructurings, assignments for the benefit of creditors, and receivership
1
In re Flywheel Sports Parent, Inc., et al., Case No. 20-12157 (JLG),
United States Bankruptcy Court for the Southern District of New York, December 7, 2020 Decision and Order Granting Trustee’s Application for an Order Authorizing Rejection of Leases and Abandonment of Leasehold Contents entered December 31, 2020 [Doc 90].
6
Rosenberg & Estis, P.C. Attorneys In The News LUISE A. BARRACK Member, Litigation
HOWARD W. KINGSLEY Member, Litigation
MICHAEL E. LEFKOWITZ Managing Member, Transactions
The Real Deal
The Real Deal Crain’s
Commercial Observer 6.01.21 NYREJ 12.22.20 The Real Deal 11.18.20 The Real Deal 10.27.20
12.09.20
12.24.20 12.22.20
ERIC S. ORENSTEIN Member, Transactions
DEBORAH E. RIEGEL Member, Litigation
JACK J. ROSE Member, Bankruptcy
Commercial Observer 12.09.20
Commercial Observer 10.19.20
Crain’s
10.02.20
7
BRADLEY S. SILVERBUSH Member, Litigation
BRETT B. THEIS Member, Litigation
BENJAMIN M. WILLIAMS Member, Property Tax
Real Estate Weekly
Crain’s
BISNOW
10.13.20
9.13.20
11.12.20
8
COVID-19 Defenses: Caselaw Update In their last column, Warren A. Estis and Alexander Lycoyannis discussed the COVID defenses of impossibility and frustration of purpose and analyzed two of the first known decisions applying them in commercial landlord-tenant disputes during the pandemic. Here, they summarize four recent lower court rulings applying the COVID defenses in commercial landlord-tenant cases.
As we (incredibly) close in on one year since the COVID-19 pandemic hit U.S. shores, the manner in which courts interpret the doctrines of frustration of purpose and impossibility of performance (the “COVID defenses”) remains top-of-mind for most in the New York real estate industry. In our last column, we discussed the COVID defenses and analyzed two of the first known decisions applying them in commercial landlord-tenant disputes during the pandemic. Since then, we have been made aware of several additional lower court rulings on the topic. Most courts have held that absent a specific lease clause providing relief, the COVID defenses do not relieve commercial tenants of the obligation to pay rent or otherwise comply with their leases. Other courts, however, have held to the contrary. Below, we summarize a representative sampling of four recent lower court rulings applying the COVID defenses in commercial landlord-tenant cases—two of which were in the owner’s favor, with the tenant prevailing in the other two—and give our thoughts as to what comes next. Where Owners Prevailed In Dr. Smood New York LLC v. Orchard Houston, Justice Laurence Love denied the tenant’s motion for a preliminary injunction enjoining the owner from terminating the lease and seeking to recover possession of the premises, finding that the tenant failed to establish a likelihood of success on the merits of its claims (2020 NY Slip Op 33707[U] [Sup Ct, New York County 2020]).
As seen in the New York Law Journal By Warren A. Estis and Alexander Lycoyannis February 2, 2021
The court noted that “for a party to avail itself of the frustration of purpose defense, there must be complete destruction of the basis of the underlying contract; partial frustration such as a diminution in business, where a tenant could continue to use the premises for an intended purpose, is insufficient to establish the defense as a matter of law” (id. at 4 [citing Robitzek Inv. Co. v. Colonial Beacon Oil Co., 265 AD 749, 753 [1st Dept 1943]). Utilizing this standard, Justice Love rejected the frustration of purpose argument because the Governor’s executive orders only prevented tenant from operating indoor dining services, while “the premises remain open for both counter service and pickup of
9
orders submitted online” (id.). The court also found the tenant’s attempt to invoke the lease’s casualty clause to be “entirely without merit as there has been no physical harm to the demised premises and the lease does not provide for a rent abatement” by reason of the pandemic (id. at 4). As a result, “[the tenant’s] obligation to pay rent and taxes pursuant to the lease continue[d] unabated” (id. at 5). In 35 E. 75th St. Corp. v. Christian Louboutin L.L.C., Justice Arlene Bluth granted summary judgment to an owner against its luxury retail tenant for, inter alia, rent and additional rent accruing since March, 2020 (2020 NY Slip Op 34063[U] [Sup Ct, New York County 2020]). The tenant asserted that the COVID defenses absolved it of the obligation to pay rent in that (1) “when it signed the lease in 2013 no one could have predicted that there would be an infectious disease that would shut down the vast majority of businesses;” (2) “its entire business was built on a highly visible and well trafficked retail location on the Upper East Side;” and (3) “the lack of customer traffic has decimated the store’s revenues” (id. at 1-2). Justice Bluth disagreed, holding that the frustration of purpose doctrine “has no applicability” because “[t]his is not a case where the retail space defendant leased no longer exists, nor is it even prohibited from selling its products” (id. at 4). While “[the tenant]’s business model of attracting street traffic is no longer profitable because there are dramatically fewer people walking around due to the pandemic…unforeseen economic forces, even the horrendous effects of a deadly virus, do not automatically permit the Court to simply rip up a contract signed between two sophisticated parties” (id.). As for impossibility of performance, the court found that “[t]he subject matter of the contract—the physical location of the retail store—is still intact” and that the tenant “is permitted to sell its products. The issue is that it cannot sell enough to pay the rent. That does not implicate the impossibility doctrine” (id. at 5). Where Tenants Prevailed By contrast, in The Gap, Inc. v. 170 Broadway Retail Owner, LLC, Justice Debra James denied the owner’s
pre-answer motion to dismiss the tenant’s causes of action relating to, inter alia, the COVID defenses (2020 NY Slip Op 33623[U] [Sup Ct, New York County 2020]). In contrast to Justice Love’s ruling in Dr. Smood, Justice James held that the tenant, a retail clothing store, stated a valid claim under the lease’s casualty clause because “plaintiff could not lawfully use the premises in the manner set forth in the lease” by reason of the governor’s order directing the closure of non-essential businesses (id. at 4). The court also held that the tenant stated viable frustration of purpose and impossibility of performance causes of action, insofar as the complaint “alleges in some factual detail, that…performance [under the lease] has been made objectively impossible, by an unanticipated event that could not have been foreseen or guarded against in the Lease, a credible description of the current worldwide pandemic, shutting down New York City ‘brick and mortar’ retail stores” (id. at 6). And, in International Plaza Assoc. L.P. v. Amorepacific US, Inc., Justice Carol Feinman denied summary judgment to an owner seeking rent arrears of over $300,000 from a cosmetics and beauty supply retail store based on the COVID defenses (2020 WL 7416600 [Sup Ct, New York County 2020]). The court found that the frustration of purpose doctrine justified the denial of summary judgment because “the shutdown of the defendant’s shop from March, 2020 to June, 2020 and the continuing restrictions made it almost impossible for defendant to fulfill its function for which it signed a lease with plaintiff” (id.). The court found it significant that “part of [the tenant’s] business includes allowing customers to test the [cosmetic] product[s],” which “is limited [due to] the important requirement that people who walk into the store must wear a face mask and that they keep a six foot distance from each other” (id.). Thus, Justice Feinman denied summary judgment and permitted the tenant to conduct discovery in order to “present facts on how it has attempted to conduct its business and its alleged failure to do so for a reason never imagined let alone foreseen by either defendant or plaintiff,” which “cannot be shown by legal memoranda or oral arguments alone” (id.). Continue reading.
10
When Does a Building Have Six or More Units? A body of law has developed over the years to determine whether a building is subject to rent stabilization by virtue of the number of housing accommodations therein. Warren Estis and Jeffrey Turkel summarize this case law.
RSL §26-504(a) states that the RSL shall only apply to buildings “containing six or more units.” ETPA 5§(a)(4) similarly states that no declaration of emergency can be declared with respect to “a building containing fewer than six dwelling units.” It would seem that counting the number of units in a building would be an easy task, but it is not. The number of apartments in a building can increase or decrease over time. “Residential” units can be legal or illegal. Residential space counts toward the six units, but commercial space does not. A body of law has developed over the years to determine whether a building is subject to rent stabilization by virtue of the number of housing accommodations therein. This article will summarize that case law. Number of Units On the Base Date Generally—and there is a major exception—the number of units in a building on the date the building first became stabilized will determine stabilization status. The base date for ETPA buildings is July 1, 1974. See Brown v. Roldan, 307 AD2d 208, 209 (1st Dept. 2004). The base date for RSL-69 buildings is May 12, 1969. See McAvity v. Mirabel, 136 Misc 2d 823 (Sup Ct, NY County 1987). Notably, the landlord has the burden of proving that a building is exempt from rent stabilization. See 124 Meserole LLC v. Recko, 55 Misc 3d 146(A) (App Term, 2d Dept. 2017); Pineda v. Irvin, 40 Misc 3d 5 (App Term, 1st Dept. 2013). Where there is insufficient proof as to the number of units on the base date, the landlord loses. See Brown v. Roldan, supra. Types of Proof
As seen in the New York Law Journal By Warren A. Estis and Jeffrey Turkel January 5, 2020
Courts will generally look at a building’s Certificate of Occupancy to determine the number of units on the base date. See, e.g., Fleur v. Croy, 137 Misc 2d 628 (Civ Ct, NY County 1987). As discussed infra, the Certificate of Occupancy is not necessarily dispositive, as it only recites legal uses, and does not reflect illegal residential use or apartments added or subtracted without the knowledge of the Department of Buildings. Courts will also look at DOB inspection reports, see Loventhal Mgt. v. New York State Div. of Hous. &
11
Community Renewal, 183 AD2d 415 (1st Dept. 1992), DOB violations, see Rivas v. Conty, 57 Misc 3d 986 (Civ Ct, Queens County 2017), and “I-Cards,” see Lloyd v. Williams, 57 Misc 3d 1224(A) (Civ Ct, Kings County 2017). The number of units can also be established through testimony. See e.g., Joe Lebnan, LLC v. Oliva, 39 Misc 3d 31 (App Term, 1st Dept. 2013).
Note the inconsistency in the rules regarding increasing or reducing the number of apartments. As to the latter, the number of apartments on the base date governs, no matter what happens thereafter. As to the former, the status on the base date is meaningless if the number is later increased to six or more.
Post-Base Date Reductions Won’t Work
Legal? Who Cares?
Many landlords believe that reducing the number of units below six after the base date will somehow free a building from rent stabilization coverage. It will not. See, Shubert v. New York State Div. of Hous. & Community Renewal, 162 AD2d 261 (1st Dept. 1990) (“Petitioner’s unilateral action in combining apartments, thereby reducing the number of residential units from seven to five subsequent to the base date … cannot effect an excemption”); Golden Horse Realty, Inc. v. New York State Div. of Hous. & Community Renewal, 173 AD3d 612 (1st Dept. 2019).
The illegality of a putative sixth unit is no impediment to a declaration that a building is stabilized. In Rubrish v. Watson, 48 Misc 3d 143(A) (App Term, 2d Dept. 2015), for example, the owner illegally converted a two family house into a 10 unit rooming house. Notwithstanding such illegal conduct, the Court found that the building was covered by the RSL. See also Rashid v. Cancel, 9 Misc 3d 130(A) (App Term, 2d Dept. 2005) (illegal use of basement for residential purposes confers stabilization status, even if DOB directs the removal of the illegal unit); Joe Lebnan, LLC, supra.
The rationale for this rule is that it would be contrary to public policy to encourage landlords to reduce the number of units for purposes of deregulating a previously stabilized building. If a landlord wants to combine units to obtain a first rent it may do so, but such combination will not affect the stabilized status of the building.
Housing Accommodation
One exception to the rule is Loventhal v. New York State Div. of Hous. & Community Renewal, supra. There, landlord — prior to the base date — illegally combined two apartments, reducing the number of units from six to five. Because the combination was illegal, the building remained stabilized. Addition of Units What happens if the building is increased to six or more units after the base date? Nothing good, at least for the landlord. The addition of the sixth unit after the base date will make the building subject to rent stabilization. See, Gandler v. Halperin, 232 AD2d 637 (1st Dept. 1996); 246 Leonard Realty LLC v. Phoa, 65 Misc 3d 145 (A) (App Term, 2d Dept. 2019). Notably, it is not only the sixth apartment that becomes rent stabilized; it is all apartments in the building. Any landlord thinking about adding a unit should make sure that he or she will not increase the number to at least six.
What counts as a housing accommodation? The answer appears to be any space sufficient to bring the building to six or more units. For example, in White Knight Ltd. v. Shea, 10 AD3d 567 (1st Dept. 2004), the building in question was owned by a theater company. The company allowed persons connected with the theater to live in windowless dressing rooms and storage rooms. The First Department held that these windowless rooms counted toward the magic number of six, writing that “the fact that these rooms do not resemble traditional apartments does not warrant a different conclusion.” In Gogarnow v. Silvia, 60 Misc 3d 337 (Civ Ct, NY County 2018), the landlord partially constructed a sixth apartment in the building, which the Court found “was not ready to be occupied.” Notwithstanding, the Court ruled that the building was stabilized: This court can reach no other conclusion than that there is a sixth space, known as ‘1R’ that is ‘intended to be occupied’ residentially. Continue reading.
12
‘Frustration’ and ‘Impossibility’: Viable Defenses Amid the Pandemic? As the COVID-19 pandemic and its accompanying economic fallout continue to unfold, commercial tenants have increasingly come to rely on the common law doctrines of impossibility of performance and frustration of purpose as defenses to the nonpayment of rent.
As the COVID-19 pandemic and its accompanying economic fallout continue to unfold, commercial tenants have increasingly come to rely on the common law doctrines of impossibility of performance and frustration of purpose as defenses to the nonpayment of rent. The doctrine of impossibility of performance excuses a tenant’s performance “only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible” (Kel Kim Corp. v Cent. Markets, Inc., 70 NY2d 900, 902 [1987]). “[T]he impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract” (id.); notably, however, “an economic downturn” is not such an unanticipated event (Urban Archaeology Ltd. v 207 E. 57th St. LLC, 68 AD3d 562 [1st Dept 2009]). “[I]mpossibility occasioned by financial hardship does not excuse performance of a contract” (id.). Accordingly, “where performance is possible, albeit unprofitable, the legal excuse of impossibility is not available” (Warner v Kaplan, 71 AD3d 1, 6 [1st Dept 2009]). The Appellate Division, First Department recently discussed the doctrine of frustration of purpose at length (although outside of the pandemic’s context) in Ctr. for Specialty Care, Inc. v CSC Acquisition I, LLC:
As seen in the New York Law Journal By Warren A. Estis and Alexander Lycoyannis December 1, 2020
In order to invoke the doctrine of frustration of purpose, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense. Examples of a lease’s purposes being declared frustrated have included situations where the tenant was unable to use the premises as a restaurant until a public sewer was completed, which took nearly three years after the lease was executed, and where a tenant who entered into a lease of premises for office space could not occupy the premises because the certificate of occupancy allowed only residential use and the landlord refused to correct it. However, frustration of purpose is not available where the event which prevented performance was foreseeable and provision could have been made for its occurrence.
13
(185 AD3d 34, 42-43 [1st Dept 2020] [citations, internal quotation marks and ellipses omitted]). Two recently-reported decisions arising in the context of Yellowstone injunction applications (see First Natl. Stores v Yellowstone Shopping Ctr., 21 NY2d 630 [1968]) demonstrate how lower courts are grappling with these doctrines during the pandemic. In Rame, LLC v Metropolitan Realty Management, Inc., the court issued a Yellowstone injunction where the underlying default arose, in part, from unpaid rent allegedly caused by the pandemic (2020 WL 6290556, 2020 NY Slip Op 33538[U] [Sup Ct, New York County 2020]). On the other hand, in BKNY1, Inc. v 132 Capulet Holdings, LLC, the court rejected the tenant’s impossibility of performance and frustration of purpose defenses and ordered the tenant to pay rent due pursuant to the Yellowstone injunction order already in place, failing which the landlord could move to vacate the Yellowstone injunction (2020 WL 5745631, 2020 NY Slip Op 33144[U] [Sup Ct, Kings County 2020]). In Rame, the landlord served a notice of default alleging that the tenant owed unpaid rent from December, 2017 through September, 2020 totaling over $1.8 million. The tenant asserted that (1) it operates numerous restaurants in the subject premises which all depend on in-person and indoor dining which, as of March 2020, were prohibited and/or severely curtailed by reason of Governor Cuomo’s pandemic-related executive orders, (2) as a result, the tenant’s business and profits declined and it was unable to pay rent, and (3) such inability to pay rent arose from the frustration of the lease’s purpose and the impossibility of performance thereunder (2020 NY Slip Op 33538[U] at 2). The tenant further asserted that it did not owe the amount of rent stated in the default notice, insofar as the lease permits a rent abatement if the tenant is unable to operate due to, inter alia, a national emergency or a governmental agency’s order or rule (id. at 2-3). For its part, the landlord argued that (1) while the governor’s executive orders had long permitted takeout and outdoor dining services, the tenant had elected to stay completely closed since March, 2020 and availed itself of neither of these options, thus negating impossi-
bility of performance and frustration of purpose as defenses, and (2) the lease requires rent to paid without any setoff or deduction whatsoever (id. at 3). Notwithstanding the parties’ disputes concerning the underlying merits, the tenant argued that it met the four-pronged Yellowstone test insofar as it held a commercial lease, it received a notice of default, the cure period had not yet expired, and it was willing and able to cure the alleged default (id. at 2). Justice Barbara Jaffe agreed, and issued a Yellowstone injunction in the tenant’s favor: Whether plaintiff is entitled to an abatement of rent under the lease, i.e., whether it will ultimately prevail in proving that it owes less than defendant asserts, is irrelevant to whether it is entitled to a Yellowstone injunction. Rather, the key issue is plaintiff’s willingness and ability to cure its default, and it has indicated both. (id. at 5). However, in light of the sizable rent arrears and the tenant’s continued occupancy of the premises, Justice Jaffe also directed as a condition of the injunction that the tenant, notwithstanding its frustration and impossibility defenses, (1) pay rent on an ongoing basis, and (2) within 20 days, post an undertaking of nearly $1.1 million, representing 50 percent of the amount due as of Oct. 1, 2020 (id.). In BKNY1, the court had previously issued a Yellowstone injunction conditioned on the tenant’s continued payment of rent (2020 NY Slip Op 33144[U], at 2). The tenant, however, failed to pay rent for April and May, 2020, but asserted that the impossibility of performance and frustration of purpose doctrines excused its violations of the court’s order (id. at 2-4). Justice Lawrence Knipel rejected the tenant’s arguments. First, Knipel held that “[t]he common-law doctrine of frustration of purpose is inapplicable under the circumstances” (id. at 3). Continue reading.
14
Fair Market Rent Appeals Years ago, bringing, or defending, a Fair Market Rent Appeal was a routine part of any rent regulatory practice. Because there are so few rent-controlled apartments left, FMRAs have become somewhat of a rarity.
Years ago, bringing, or defending, a Fair Market Rent Appeal (FMRA) was a routine part of any rent regulatory practice. Because there are so few rentcontrolled apartments left, FMRAs have become somewhat of a rarity. Nevertheless, the successful defense of an FMRA, under appropriate circumstances, can lead to a ruling that the apartment had been deregulated under the luxury deregulation provisions of the RSL that existed prior to the HSTPA. Pursuant to L. 1971, ch. 371, rent-controlled apartments vacated on or after June 30, 1971 became decontrolled. See CRL §26-403(e)(2)(i)(9). Three years later, pursuant to the Emergency Tenant Protection Act (L. 1974, ch. 576, §4) (ETPA), decontrolled apartments in buildings with six or more units generally became subject to the RSL. The ETPA also addressed the issue of how to calculate the first stabilized rent of a former rent-controlled apartment. The answer is codified in RSL §26-512(b) (2), which states that the “initial legal regulated rent” for such an accommodation shall be “the rent agreed to by the landlord and the tenant and reserved in a lease or provided for in a rental agreement.” That sentence ends, however, with the language “provided that such initial rent may be adjusted on application of the tenant pursuant to subdivision b of section 26-513 of this chapter.” That application is an FMRA.
As seen in the New York Law Journal By Warren A. Estis and Jeffrey Turkel November 3, 2020
RSL §26-513(b) provides that a tenant can file an FMRA to challenge the legality of the initial legal regulated rent, and need only allege that the rent to which the tenant and the landlord agreed “is in excess of the fair market rent.” Because the fair market value of any commodity is defined as what a willing buyer and seller agree to, it is difficult to understand how the negotiated rent set forth in the lease could in any way be “unfair,” or above market. As it turns out, “fair market rent” is a term of art, defined as the former rentcontrolled rent as adjusted by various formulas. Thus if the negotiated rent exceeds the rent established by that formula, the rent will be adjusted downward to what the formula permits.
15
Setting the initial rent thus became an all or nothing game. If the tenant did not timely file an FMRA, the initial legal regulated rent became the stabilized rent, no matter how high. If the tenant timely filed, the rent could be reduced dramatically. Filing Deadlines There are two deadlines for filing an FMRA. Where the landlord served the incoming tenant with an “RR 1” form, i.e., a Notice of Initial Legal Regulated Rent, the tenant has 90 days to file. See RSC §2522.3(a). Where a tenant fails to do so, the FMRA will be dismissed, and the initial legal regulated rent is lawful for all purposes. See Park v. New York State Div. of Hous. & Community Renewal, 150 AD3d 105, 114 (1st Dept 2017), lv. to appeal dismissed 30 NY3d 961 (2017); Matter of Verbalis v. New York State Div. of Hous. & Community Renewal, 1 AD3d 101, 102 (1st Dept 2003). Where the landlord did not serve an RR-1, the tenant has four years to file. RSC §2522.3(c)(2) states that an FMRA “shall be dismissed where…the appeal is filed more than four years after the vacancy which caused the housing accommodation to no longer be subject to the City Rent Law.” RSC §2523.1 similarly provides that where an FMRA “is filed four years or more after the first date the housing accommodation was no longer subject to the City Rent Law, the application shall be dismissed pursuant to section 2522.3(c) of this Title.” The First Department has consistently held that if the incoming tenant did not challenge the initial rent within four years, that rent can no longer be challenged. See Olsen v. Stellar W. 110, LLC, 96 AD3d 440, 441 (1st Dept 2012); Wasserman v. Gordon, 24 AD3d 201, 202 (1st Dept 2005); Levinson v. 390 W. End Assoc. L.L.C., 22 AD3d 397, 401 (1st Dept 2005). Luxury Deregulation Over the past several years, FMRAs have come to the fore in cases where the issue is whether an apartment coming out of rent-control prior to the HSTPA had been luxury deregulated. A typical scenario is where the first tenant after rent control pays a rent higher than
the luxury deregulation threshold at the time of the vacancy, but fails to file an FMRA within the 90 day or four-year deadlines. In such circumstances, both the Courts and DHCR have held that the apartment is deregulated. In 3505 BWAY Owner v. McNeely, 67 Misc 3d 583 (Civ Ct, NY County 2020), the first post-rent-controlled tenant moved in to the apartment in 2009 at an agreed-upon rent of $2,000 per month, which at that time was equal to the luxury deregulation threshold under RSL §26502(a). It was undisputed that the tenant did not timely file an FMRA. On these facts, Civil Court declared that the apartment had been luxury deregulated in 2009: Here, the Petitioner not only decontrolled the Premises after the last rent-controlled tenant vacated, but simultaneously deregulated the Premises pursuant to the luxury deregulation provisions in effect at the time, now repealed, RSL §26-504.2(a). Therefore, Respondent cannot challenge the rent regulated status of the Premises other than by challenging the legality of the first rent which qualified the Premises for deregulation. The only means by which to challenge the first rent is to prove that the rent exceeded the higher of either comparable rents or RGB increases plus IAI’s, which is the exact process of a FMRA. Although Respondent claims she is challenging the rent regulatory status of the Premises in her fifth affirmative defense, in substance, she is requesting a FMRA. Citing RSC §2522.3, Civil Court concluded that “the statute of limitations for filing an FMRA must be enforced here and bars Respondent from challenging the rent regulatory status of the Premises.” On that basis, the Court dismissed the tenant’s fifth affirmative defense, which alleged that the apartment was subject to rent stabilization. See also 400 E. 58 Owner LLC v. Herrnson, 64 Misc 3d 1202(A) (Civ Ct, NY County 2019) (Ortiz, J.). Continue reading.
16
Conditional Limitation v. Condition Subsequent: An Important Distinction in the COVID-19 Age As commercial rent defaults significantly increase due to the COVID-19 pandemic, practitioners reviewing the default provisions in their clients’ commercial leases must ask themselves a crucial question: Does the provision set out a conditional limitation or a condition subsequent? The answer to this arcane question—which can trip up even experienced attorneys—will determine the forum in which an owner can recover possession.
In our last column, we discussed the ability of owners to commence ejectment actions in Supreme Court as an alternative to holdover proceedings in the New York City Civil Court’s landlord-tenant part (or the analogous part in other local courts)—an option being chosen by many owners in light of the COVID-19 pandemic grinding landlord-tenant cases to a virtual halt. The pandemic is affecting the choice between ejectment actions and holdover proceedings in another significant way. As rent defaults skyrocket in 2020, practitioners reviewing the default provisions in their clients’ commercial leases must ask themselves a crucial question: does the provision set out a conditional limitation or a condition subsequent? The answer to this arcane question—which can trip up even experienced attorneys—will determine the forum in which an owner can recover possession. The common assumption among many practitioners is that all landlord-tenant cases can be brought in the Civil Court. However, while this is true in connection with a lease termination based upon a conditional limitation, landlord-tenant courts—in which proceedings are governed by the Real Property Actions and Proceedings Law (RPAPL)—lack subject matter jurisdiction if the termination results from a condition subsequent. The distinction between a conditional limitation and a condition subsequent was perhaps best explained by the court in Lamlon Dev. Corp. v. Owens:
As seen in New York Law Journal By Warren A. Estis and Alexander Lycoyannis October 6, 2020
… [T]he courts have consistently recognized a distinction in the termination of a leasehold pursuant to a condition (or condition subsequent) and a conditional limitation. If a leasehold can be terminated because the tenant’s breach of a condition of the lease gives the landlord the option to declare the lease at an end, thereby exercising his right of forfeiture, a condition exists pursuant to which the landlord must enforce the forfeiture by reentry in an action for ejectment. If, however, the landlord has the option to terminate the lease by serving a notice fixing a time after the lapse of which the lease will automatically expire, a conditional limitation of the leasehold exists, pursuant to which a summary holdover proceeding will lie. (141 Misc 2d 287, 289-90 [Dist Ct, Nassau County
17
1988] [citations omitted]). Here is an example of a default provision containing a conditional limitation: If Tenant defaults in the performance of any of its obligations hereunder, and such default continues for ten (10) days after notice to Tenant with respect to the failure to pay any monies, or thirty (30) days after notice to Tenant with respect to the failure to perform or comply with any non-monetary obligations of Tenant hereunder, then Landlord may at its option terminate this Lease upon giving three (3) days’ notice by certified mail of termination to Tenant, in which event neither Tenant nor any person claiming through or under the Tenant shall be entitled to possession or to remain in possession of the Demised Premises but shall forthwith quit and surrender the Demised Premises. Note the hallmark of a conditional limitation: the lapse of the tenancy after an event (a default under the lease) and time period (10 or 30 days, depending on the nature of the default) specified in the lease. On the other hand, here is an example of a default provision from a commonly-used form lease containing a condition subsequent: If the Tenant shall make default in the payment of the rent reserved hereunder, or any item of “additional rent” herein mentioned, or any part of either or in making any other payment herein provided for… the Landlord may immediately, or at any time thereafter, re-enter the demised premises and remove all persons and all or any property therefrom… Thus, in the case of a condition subsequent, the tenancy terminates after a default only upon the owner taking affirmative action to do so—not upon the lapse of a period of time. The significance of this distinction arises from RPAPL §711, which defines the grounds on which a landlord-tenant summary proceeding may be based. Insofar as the summary proceeding is a creature of statute,
“it is well established that there must be strict compliance with the statutory requirements to give the court jurisdiction” (MSG Pomp Corp. v. Doe, 185 AD2d 798, 799-800 [1st Dept 1992]). RPAPL §711(1) provides, inter alia, that a landlord may commence a summary proceeding where “[t]he tenant continues in possession of any portion of the premises after the expiration of [its] term, without the permission of the landlord…”. Expiration of the tenant’s term “has been construed to mean expiration by lapse of time, i.e., by natural conclusion of the lease term or by operation of a conditional limitation contained in the lease document which works an automatic termination of the tenancy upon the happening of a specified event” (Matter of Calvi v. Knutson, 195 AD2d 828, 830 [3d Dept 1993]). Thus, an owner is entitled to commence a summary holdover proceeding where, inter alia, the period set forth in a default notice expires without the tenant having effected a cure by the deadline set forth in the notice (see e.g. Miller v. Levi, 44 NY 489, 493 [1871]; Matter of Calvi v. Knutson, 195 AD2d at 830; Perrotta v. W. Regional Off-Track Betting Corp., 98 AD2d 1, 2 [4th Dept 1983]). On the other hand, a lease termination “resulting from the landlord’s option to exercise his or her reserved right of reentry upon the tenant’s breach of a lease covenant [i.e. the exercise of a condition subsequent], because it is not an expiration by lapse of time, consistently has been recognized not to be an expiration within the meaning of RPAPL 711(1)” (Matter of Calvi v. Knutson, 195 AD2d at 830). In such circumstance, the owner seeking to obtain possession is not entitled to maintain a summary proceeding and must instead commence an action to recover real property (i.e. an ejectment action) in Supreme Court pursuant to RPAPL Article 6 (see e.g. Miller v. Levi, 44 NY at 493; Perrotta v. W. Regional Off-Track Betting Corp., 98 AD2d at 5; LLDP Realty Co., LLC v. AGHR Enterprises LLC, 44 Misc 3d 716, 718-19 [Civ Ct, Kings County 2014]; 451 Rescue LLC v. Rodriguez, 15 Misc 3d 1140[A], 2007 NY Slip Op 51062[U] [Civ Ct, New York County 2007]). Continue reading.
18
Rosenberg & Estis P.C. Positions to Meet Growing Market Demand Brings in Two New Members; Names a New Member and Promotes Five Attorneys Internally
Featuring John D. Giampolo, David B. Horn, Daniel Grobman, Peter B. Kane, Dejan Kezunovic, Benjamin Z. Koblentz and Zachary J. Rothken January 1, 2021
Rosenberg and Estis, P.C., a leading New York City real estate law firm, has announced a series of personnel additions and changes to meet increased demand for services from clients managing current market conditions. The firm has brought in two new members, and it has named a new member and promoted five attorneys to of counsel internally. John D. Giampolo and David B. Horn have joined the firm as members and Patrick R. Tierney, formerly of counsel with the firm, has been named a member. Daniel Grobman, Peter B. Kane, Dejan Kezunovic, Benjamin Z. Koblentz and Zachary J. Rothken have been promoted within the firm to of counsel. The expansion demonstrates Rosenberg & Estis’ continued commitment to providing clients with comprehensive legal representation across all aspects of real estate. The firm offers departments in Litigation, Real Estate Transactions, Administrative Law/Rent Regulations, Construction, Co-Op/Condo, Property Tax (Certiorari), Reorganization & Bankruptcy, Tax Incentives & Affordable Housing, and Zoning & Land Use. “We are pleased to welcome these new attorneys to our firm and we congratulate the accomplished attorneys within our firm on their promotions,” said managing member Michael E. Lefkowitz. “The
extensive experience and industry knowledge of these attorneys will greatly benefit our clients as we help them navigate the current challenging environment for the real estate community.” Giampolo, previously a partner in Ice Miller LLP’s New York office, joins the firm’s Reorganization & Bankruptcy and Litigation Departments. He has more than 15 years of experience focusing his practice on bankruptcy, complex commercial litigation and related transactions. He has represented Chapter 11 debtors, committees, landlords and others in core bankruptcy proceedings and insolvency related matters, including high profile matters such as Lehman Brothers and Madoff, as well as distressed investing. His practice also focuses on litigation in various disputes in both federal and state courts, as well as serving as outside general counsel for companies in various industries. Horn, previously a partner with Duval & Stachenfeld LLP, has more than 25 years of experience in real estate law and joins the firm’s Transactions Department. He has represented clients nationally and in New York in the acquisition, financing, development and disposition of office buildings, residential developments, retail properties, hotels and industrial assets. He has extensive experience in joint venture agreements, real estate capital market transactions, and in representing landlords and tenants in
19
commercial leasing transactions involving office, retail and industrial properties. In addition to the new members joining the firm, Patrick Tierney has been named a member within the firm’s Transactions Department. Patrick has over 15 years of experience at the highest levels of practice in structuring, negotiating, and closing complex commercial real estate transactions in New York and throughout the United States, including acquisitions and dispositions, joint ventures, development projects, financing, ground leasing, and industrial, office, and retail leasing. His practice spans all asset classes, including office buildings, raw land/groundup developments, hotels, restaurants, residential and mixed-use buildings and complexes, shopping centers, ski resorts, and various portfolios.
John Giampolo Member
David B. Horn Member
Patrick R. Tierney Member
Daniel Grobman Of Counsel
Peter B. Kane Of Counsel
Dejan Kezunovic Of Counsel
Benjabim Koblentz Of Counsel
Zachary J. Rothken Of Counsel
Rosenberg & Estis also has promoted five firm attorneys to of counsel. Daniel Grobman has been promoted from associate to of counsel within the firm’s Transactional Department. Daniel specializes in commercial leasing transactions, including the negotiation of new retail and office leases, lease amendments, guarantees and SNDAs. Daniel also has experience with construction and property management matters, as well as major financings and refinancings. Peter Kane has been promoted from associate to of counsel within the firm’s Litigation Department. He has represented commercial litigation matters in state and federal courts, including commercial contract disputes, business torts, securities actions and all areas of real estate litigation on behalf of real estate owners and developers in connection with real estate transactions, commercial landlord-tenant proceedings and ownership disputes. Dejan Kezunovic has been promoted from associate to of counsel within the firm’s Litigation Department. Mr. Kezunovic has represented clients in complex commercial, construction and residential real estate matters, and strives to deliver results and create leverage for clients prior to commencement of litigation or through aggressive motion practice at the outset of
20
litigation. He has also helped clients navigate various legal issues arising as a result of the COVID-19 pandemic, including defending against equitable theories raised by tenants seeking to avoid payment of rent. With a threeyear clerkship experience in the Commercial Division of the New York Supreme Court under his belt, Mr. Kezunovic strives to provide objective counsel and prepare cost-effective strategies to clients, which include some of the largest landlords and developers in New York City. Benjamin Koblentz has been promoted from associate to of counsel within the firm’s Litigation Department. He has broad experience in complex matters, including general commercial litigation and real estate/constructionrelated litigation in both state and federal courts. Substantive areas include contract and business disputes, lease disputes, tort, securities, fiduciary duty, false advertising, trademark, right of publicity, alter ego liability, consumer class action, insurance coverage and disputes arising from corporate transactions. Koblentz has also conducted internal investigations in response to inquiries from the Department of Justice, Securities and Exchange Commission and Office of Foreign Assets Control. Zachary J. Rothken has been promoted from associate to of counsel within the firm’s Administrative Law Department. He focuses his practice on complex rent regulatory issues and has extensive experience representing property owners in administrative proceedings before DHCR and other administrative agencies, including claims alleging rent overcharge, TPU audits, petitions for administrative review and reduction of services. He also has extensive experience counseling prospective purchasers, sellers and lenders in performing due diligence on properties subject to rent regulation. His practice also includes representing property owners in a wide variety of litigation matters, including: Article 78 proceedings, Supreme Court actions and landlord-tenant summary proceedings.
21
“We are pleased to welcome these new attorneys to our firm and we congratulate the accomplished attorneys within our firm on their promotions,” said managing member Michael E. Lefkowitz. “The extensive experience and industry knowledge of these attorneys will greatly benefit our clients as we help them navigate the current challenging environment for the real estate community.”
22
Rosenberg & Estis, P.C. Swiftly Regains Possession Of Parking Garage For Manhattan Cooperative Decisive Action Prompts Operator in Default to Turn Over Possession in 13 Days Featuring Bradley S. Silverbush, Howard W. Kingsley, Norman Flitt and Richard B. Corde October 7, 2020
Rosenberg & Estis, P.C. has secured a significant victory for a cooperative on East 57th Street in New York State Supreme Court in New York County, swiftly securing possession of a parking garage within the building whose leaseholder had defaulted on rent payments. Rosenberg & Estis, P.C. members Bradley S. Silverbush, Howard W. Kingsley and Norman Flitt, and associate Richard B. Corde, represented Excelsior 57th Corp. against Select Parking LLC and Citizens Icon Holdings before Supreme Court Justice David Benjamin Cohen. Following the pandemic, the master lease holder surrendered possession and assigned the rents owed by subtenants to the co-op, leaving the cooperative to deal with the existing parking garage operator who was three months in arrears. While the sublease expired, given the existing eviction moratorium, Rosenberg & Estis moved in State Supreme Court for declaratory judgment, seeking an order directing the garage operator to pay the arrears and surrender possession. Rosenberg & Estis filed for an Order to Show Cause which also sought to enforce a sublease provision that required the garage to pay holdover use and occupancy at triple the rent that was in effect at the expiration of the sublease. The court directed a virtual hearing on the requested relief at which the defendants failed to appear and upon completion of the hearing, granted Rosenberg & Estis the relief it sought. The court’s order included a direction that the operator pay a total of $1,571,812 in arrears, and in addition, turn over all daily receipts effec-
tive as of the date of the court’s order, to be paid to the co-op within two days of receipt. Attorney Silverbush and the litigation team successfully opposed the garage’s subsequent attempt to vacate the court’s order; after a hearing on the claims asserted, Justice Cohen rejected the arguments advanced and kept the order in place resulting in the voluntary vacatur and surrender of the garage to the coop. “This case demonstrates that even at a time of enormous distress, when the court system has been hampered by COVID-19 and resulting case backlogs, decisive and creative legal representation can protect the rights of property owners,” Silverbush said.
“This case demonstrates that even at a time of enormous distress, when the court system has been hampered by COVID-19 and resulting case backlogs, decisive and creative legal representation can protect the rights of property owners,” Silverbush said.
23
Bradley S. Silverbush Member
Howard W. Kingsley Member
Norman Flitt Member
Richard B. Corde Associate
24
Rosenberg & Estis, P.C.’s Award-Winning Attorneys
25
Adam J. Lindenbaum Awarded the AV Preeminent Rating from Martindale Hubbell
Alexander Lycoyannis Awarded the AV Preeminent Rating from Martindale Hubbell
Michael A. Pensabene Awarded both the AV Preeminent Rating and the Platinum Client Award from Martindale Hubbell
T. 212 551 8405
T. 212 551 8416
T. 212 551 8406
Deborah E. Riegel Selected by Crain’s New York Business as a 2021 Leading Woman in the Law
Jeffrey Turkel Awarded the AV Preeminent Rating from Martindale Hubbell
T. 212 551 8466
T. 212 551 8490
26
27
Recent Events
Dressed for Distress: A Once in a Cycle Deal for the Most Strategic CRE Investors PANEL 2: KNOCK DOWN DRAG OUT: UNLOADING LOANS & SOURCING OPPORTUNITIES AHEAD OF THE COMPETITION
On January 26, 2021, John D. Giampolo moderated the second panel at Commercial Observer’s virtual event called “Dressed for Distress: A Once in a Cycle Deal for the Most Strategic CRE Investors.” The program addressed distressed debt sales and opportunities for market players to capitalize on distressed real estate assets at bargain prices as New York returns to normalcy with restrictions lifted and vaccines accessible. Click here to watch the recording.
FEAT:
John D. Giampolo, 01.26.21
28
New York Law Journal’s Virtual New York Legal Awards 2020 R&E NAMED LITIGATION DEPT. OF THE YEAR: REAL ESTATE
Congratulations once again to R&E’s Litigation Team - for the second time since 2018, they earned New York Law Journal’s Litigation Department of the Year: Real Estate Award! R&E was honored tonight at the virtual New York Legal Awards. Here is the acceptance speech delivered by Luise A. Barrack, leader of our Litigation Group. Click here to watch the acceptance speech.
FEAT:
Luise A. Barrack, 11.17.20
29
Updated Value-Add Strategies to Rethink the Buy-Rehab-Sell Game NEW YORK MULTIFAMILY SUMMIT
Mark N. Aloia was invited to moderate the “Updated Value-Add Strategies to Rethink the Buy-Rehab-Sell Game” panel at this year’s New York Multifamily Summit. The panel addressed how buyers are finding and funding new deals in and around the Tri-State area today, how covid-19 has changed the rehab business plan, how government incentives can be used to reduce costs and improve NOI, and more. Click here to watch the seminar recording.
FEAT:
Mark N. Aloia, 10.08.20
Rosenberg & Estis, P.C. 733 Third Avenue New York, NY 10017 T. 212 867 6000 www.rosenbergestis.com
This is published by the law firm Rosenberg & Estis, P.C. It is not intended to provide legal advice or opinion. Such advice may only be given when related to specific fact situations that Rosenberg & Estis, P.C. has accepted an engagement as counsel to address. Š2021 Rosenberg & Estis, P.C. | ATTORNEY ADVERTISING