Our latest Client Newsletter is a great opportunity to celebrate Rosenberg & Estis’ 50th anniversary. We are proud to have been on the frontlines of the commercial real estate industry for the past five decades, and we look forward to continuing to serve our clients - and the industry at large - for the years to come. It is an honor and privilege to work side-by-side with some of the largest developers, architects, investors, and innovators in New York. We are also proud of the firm’s recent honor from U.S. News & World Report, which named the firm to its list of 2024 Best Companies to Work For: Law Firms. This follows our inclusion on Crain’s 2024 and 2023 Best Places to Work in NYC lists. As always, our team of attorneys are available to answer any of your questions.”
Gary M. Rosenberg Founding Member & Chairman of the Board of Directors
As we approach the firm’s landmark 50-year anniversary, this special feature reflects on Rosenberg & Estis’ superior legacy spanning all aspects of legal real estate services.
The CTA requires many businesses to disclose their beneficial owners to comply with new federal regulations, with deadlines rapidly approaching for entities formed before January 1, 2024. Failure to comply can result in significant civil and criminal penalties. Learn more by reading this special section by William R. Byers, a Member with R&E’s Transactional Department. Join R&E’s CTA Webinar on October 15, 2024 to learn more about important CTA facts and deadlines that are approaching.
at the Appellate
Department,
secured a crucial rezoning in Brooklyn and continued groundbreaking transactional representation at One World Trade Center.
As New York City’s premier real estate law firm, R&E attorneys were invited as expert speakers on in-person panels as well as several webinars.
Rosenberg & Estis, P.C.
50 Years at the Forefront of New York City’s Real Estate Industry
R&E EXCLUSIVE FEATURE STORY
September 2024
Rosenberg & Estis (R&E) was founded in 1975 by Gary M. Rosenberg and the late Warren A. Estis to provide legal services to New York City residential property owners who are navigating complex landlord / tenant issues. Since that time, the New York City real estate industry has evolved dramatically, from a local industry with individual and family owners to a global asset class with large institutional players. As the industry has changed, so has R&E, growing in size and scope to offer a comprehensive suite of services for all industry members.
Now, as R&E celebrates its 50th anniversary, R&E stands as the city’s leading full-service boutique real estate law firm, offering superior legal services to its clients in every aspect of their real estate operations. The firm has a total of 95 attorneys and has received countless recognitions from leading industry publications including the New York Law Journal, Crain’s New York Business and Law360, among many others. In both 2020 and 2018, the firm’s Litigation team was named Real Estate Litigation Department of the Year by the NYLJ. The firm was also named among the top workplaces in the city by U.S. News & World Report and by Crain’s NY.
During its 50-year history, R&E’s litigators have had the honor of representing the city’s premier developers and owners, securing dozens of major industry victories in New York State Supreme Court, the Appellate Division and the Court of Appeals. The success of the firm’s litigation efforts has advanced the interests of all industry members, helping to create law on important regulatory issues.
R&E’s transactional department has helped New York’s leading developers assemble, vacate, finance and develop buildings which have transformed New York City.
Growing with the Industry
In the early days of the firm, R&E’s initial clients were the Bronx Realty Advisory Board and the Community Housing
Improvement Program, organizations that were largely comprised of individual owners of a few residential buildings. At the time, insurance companies were among the only institutional owners, along with several family owners, who had developed large portfolios of commercial properties.
While landlord / tenant work was the foundation of the firm, R&E made a strategic decision to specialize in all aspects of real estate representation, offering clients comprehensive resources and operating at the highest level without focusing on growth for the sake of growth. The firm has grown with its clients, evolving to meet their changing needs, and continues to remain at the forefront of the real estate industry.
In the 1980’s and 1990’s, the firm positioned itself to provide critical services during the rebirth of the New York City office market. Notably, the firm launched a transaction practice and began working with major developers, including the Durst Organization, Vornado and the Brodsky Organization, on ground-up developments and transactions.
R&E’s depth and breadth of experience representing small landlords on tenant issues powerfully positioned the firm to provide legal services during the rise of the REITs, which were able to acquire tens of thousands of units of rental housing through the efficient use of financing. When private equity entered the market, R&E had established itself as a leading real estate law firm with expertise in mid-market deals, from $25 to $150 million.
Larger institutions retained the firm to provide first-hand insight on regulatory issues, due diligence, compliance and other local issues. These entities benefited from R&E’s history and on-the-ground experience as they acquired large portfolios of multifamily assets.
Following 9/11, R&E began representing insurance companies as they tried to assess property damage from the terror-
ist attacks. The firm has continued to adapt in recent years, acting as a leader in the EB-5 space, facilitating the first and largest C-Pace loan, and helping owners and lenders work through the current distress in the office market. R&E is now positioning itself to be an industry leader in diversity. Most recently, R&E hosted the inaugural symposium of the Metropolitan Black Bar Association.
Monumental Projects
The assemblage and development of two full-block projects by the Durst Organization in Manhattan stand among the transformational development projects facilitated by R&E. This includes 3.5 million square feet of office space in two buildings on the block between Avenue of the Americas and Broadway and between 42nd and 43rd Streets; and 1.5 million square feet of residential development in three properties encompassing the entire block between 11th and 12th Avenues and between 57th and 58th Streets. R&E provided comprehensive legal services, from assemblage, to litigation and financing, for both developments.
4 Times Square
The redevelopment of the block between 42nd and 43rd Streets began following extensive litigation related to the 42nd Street Development Project. R&E managed the assemblage, acquisition and financing for the construction of 4 Times Square, a 48-story, 1.6-million-square-foot property located on Broadway between 42nd and 43rd Streets. The firm also managed the retail leasing for the transformative project, which was the first major new skyscraper in Times Square, and which ushered in a new era for 42nd Street and the surrounding areas.
One Bryant Park
R&E was also deeply involved in the complex assemblage and development of the eastern portion of the same block along Avenue of the Americas, a lengthy process that ran from the late 1980’s to 2004. The firm provided legal services
and strategic counseling for the acquisition of all individual parcels in the assemblage, including negotiations with several owners who became legendary holdouts. R&E also assisted with the development of multiple temporary, one-story retail properties, as “taxpayers,” to generate revenue during the extended assemblage process.
The assemblage of this site included the demolition of the 13-story Diplomat Hotel, which was operating as an SRO hotel at the time and required extensive efforts to vacate. In order to clear the way for demolition of the property, R&E had to prove that the building was not a viable enterprise and that it was more efficient to demolish it and replace it with a one-story building than to continue operating the SRO. To accommodate the residents of the hotel, R&E assisted with the acquisition of a separate Times Square hotel, which was renovated and presented as an upgraded alternative to the tenants. After relocating numerous tenants, R&E successfully evicted the remaining two hold outs and advanced the demolition.
As part of the assemblage project, R&E assisted with the purchase of Henry Miller’s Theater, now the Stephen Sondheim Theater, which was landmarked and could not be demolished. However, to enable expansive floorplates for trading floors on the lower levels of One Bryant Park, the property had to be demolished. R&E worked with New York State to preempt the NYC Landmarks Preservation Laws and restrictive zoning by condemning the property. This enabled the Durst Organization to demolish the bulk of the theater while maintaining the façade and recreating a theater that descended below street level, rather than rising above it, clearing the way for unobstructed floor plates.
At the end of the One Bryant Park assemblage, but prior to construction, New York City was paralyzed by the terrorist attacks of 9/11. This horrific episode threatened to undermine New York City’s position as the financial capital of the
nation as many banks feared the loss of business continuity and began exploring alternative locations for all or part of their operations. The future of the city as a towering city of business was in question. However, R&E, working with the Durst Organization and Bank of America, obtained the assistance of the NYS Empire Development Corporation and the NYC Economic Development Corporation. This cooperative effort resulted in the powerful commitment to the city, with the announcement of the establishment of BOA’s global headquarters for investment banking in a new, 50-story tower: the Bank of America Tower, or One Bryant Park. This show of faith by the bank and by the Durst Organization sent a powerful message and opened the way for others to recommit at a time when many believed tall buildings would no longer be built.
In order to facilitate the project with New York City and New York State, the Durst Organization had to secure Bank of America’s commitment at a very early stage in the project. So early, in fact, that it was impossible to determine the building specifications or a rent for the space. To overcome this hurdle, R&E developed a complex rent formula based on building costs in the yet-to-be-designed property. This enabled the two joint venture partners to sign a binding lease while the construction plans were still in a preliminary phase.
R&E then led the effort to obtain a PILOT and Federally subsidized Liberty Bonds for the project. R&E led the creation of the first financing that combined tax exempt Liberty Bonds and taxable financing as part of what was then the largest construction loan.
11th Avenue to 12th Avenue, 57th Street to 58th Street
The development by the Durst Organization of the block between 11th and 12th Avenues, and between 57th and 58th Streets, includes the fascinating history of the Estate of Thomas Appleby dating back to the 1850s. Appleby had a license with the City to collect and dump fly ash into the Hudson River. As part of the agreement, he could keep any land created by this landfill effort. Over the years, this agreement led to the creation of significant parcels of land, beginning at 70th Street and running all the way down to approximately 39th Street. More than 100 years later, the estate still owns much of this property. However, the beneficiaries are not developers and had hoped to generate more revenue from their land at 57th Street than they were receiving from the existing small commercial buildings. R&E negotiated a net lease for the entire block on behalf of the Durst Organization. However, there was a complication: the block was zoned commercial and the City, at that time, did not want to rezone it to residential. Initially, the zoning only allowed enough residential zoning to build The Helena, a 600-unit, 38-story rental tower. It took another seven years to rezone the rest of the block for residential use and there are now almost 2,000 residential units on the block. R&E led the construction, financing and permanent loan financing as well as all of the retail leasing for the project.
R&E and the Future of the Real Estate Industry
Throughout its history, R&E has been a leader within the real estate industry, making law on critical industry issues, providing superior legal services for all elements of the industry and evolving to support its clients as the industry faces new challenges. The firm benefits from its deep history, its pool of talent and from its singular focus on the real estate industry.
Landmark Legal Cases
R&E has secured many critical victories for the industry during its history. Among the stand-out cases:
Casey v Whitehouse Estates, Inc., 39 NY3d 1104 (2023). Court of Appeals held that DHCR’s default rent formula cannot be used where the landlord’s alleged fraud took place after the base date, and thus could not have rendered the base date rent unreliable.
Matter of Regina Metro. Co. LLC v New York State Div. of Hous. & Community Renewal, 35 NY3d 332 (2020). Court of Appeals ruled that retroactive application of HSTPA overcharge amendments against landlords violates due process.
West Vil. Houses Renters Union v WVH Hous. Dev. Fund Corp., 175 AD3d 1210 (1st Dept 2019). First Department ruled that unsold apartments in a former Mitchell-Lama cooperative did not become rent stabilized upon the complex’s withdrawal from the Mitchell-Lama program.
Altman v 285 W. Fourth LLC, 31 NY3d 178 (2018). In Altman, the Court of Appeals reviewed whether, under Rent Stabilization Law § 26-504.2(a), a landlord was entitled to factor in the permitted 20% vacancy increase after a tenant vacated when determining whether an apartment was exempt from rent stabilization by virtue of its rents exceeding the high rent deregulation threshold, or whether the rent must exceed the high rent deregulation threshold at the time of the vacancy, without factoring in the 20% vacancy increase. The Court held that the 20% increase upon vacancy should have been considered in determining whether the legal regulated rent was above the deregulation threshold. The court declared that the tenant was not entitled to the protection of rent stabilization because the apartment had become exempt in March 2005 pursuant to Rent Stabilization Law § 26-504.2(a) when the legal regulated rent — including the 20% vacancy increase — exceeded $2,000. This established the rule that it is the legal rent that the new tenant is paying which determines whether the unit is subject to high-rent deregulation.
Pultz v Economakis, 10 NY2d 542 (2008). Court of Appeals ruled that the Rent Stabilization Law does not limit the number of apartments a landlord can recover for his
or her own use.
Matter of KSLM-Columbus Apartments, Inc. v New York State Div. of Hous. and Community Renewal, 5 NY3d 303 (2005). Court of Appeals held that Mitchell-Lama housing, which transitioned from Mitchell-Lama status to Rent Stabilization, was entitled to make an application based upon the unique and peculiar circumstances. This application would allow the rent to be substantially adjusted upon entering the rent stabilization system after being continuously subject to the Mitchell-Lama laws. This precedent allowed the economic conversion of such projects into rent stabilization.
520 East 81st St. Assoc. v State of New York, 19 AD3d 24 (1st Dept 2005). First Department ruled, for the first time, that pre-judgment interest on a takings award must (1) reflect the actual rate of return that the condemnee would have earned on the award during the takings period, and (2) be compounded at said market rate.
Manocherian v Lenox Hill Hosp., 229 AD2d 197 (1st Dept 1997). First Department ruled that where a nonprofit institution sublets a rent stabilized apartment to an affiliate, the institution will not be entitled to a renewal lease, on grounds of non-primary residence, unless (1) the sublease specifies a particular individual as the intended occupant; (2) no perpetual tenancy is possible; and (3) the named individual actually uses the apartment as his or her primary residence.
Manocherian v Lenox Hill Hosp., 84 NY2d 385 (1994). Court of Appeals struck down a Rent Stabilization Law provision as unconstitutional; the provision would have allowed not-for-profit hospitals to control rent-stabilized apartments indefinitely, thus destroying a landlord’s reversionary interest therein.
Matter of Whitney Museum of Am. Art v New York State Div. of Hous. & Community Renewal, 73 NY2d 938 (1989). Court of Appeals ruled that a not-for-profit museum can withdraw a building’s rent-controlled units from the housing and non-housing markets without having to vacate commercial space within the building.
Seawall Assoc. v City of New York, 74 NY2d 92 (1989). Court of Appeals struck down the New York City Local Law prohibiting landlords from demolishing, altering, or converting SRO units as unconstitutional.
Park West Village v Lewis, 62 NY2d 431 (1984). Court of Appeals ruled that the tenant violated a substantial obligation of her tenancy by conducting her entire psychotherapy practice out of her rent stabilized apartment.
Hudson View Properties v Weiss, 59 NY2d 733 (1983). The Court of Appeals held that a non-immediate family member who had been occupying the apartment for a
substantial period was not entitled to the protection of the rent control laws. The occupant claimed that this was discrimination based upon marital status since if she was married to the named tenant she would have been entitled to occupancy and succession and that her relationship was tantamount to marriage. The Court held that enforcing the requirement to be an immediate family member did not discriminate based upon the marital status. Thereafter, the legislature enacted the “Roommate Law” allowing for specified situations to be allowed, but that the roommate did not succeed to the rent regulated status.
La Guardia v Cavanaugh, 53 NY2d 67 (1981). The Court of Appeals held that class B multiple dwellings were not covered by the Emergency Tenant Protection Act of 1974 (ETPA), thereby exempting all SROs from coverage under the ETPA. Shortly thereafter, the legislature enacted a new law specifically extending the ETPA to SROs.
Corporate Transparency Act: Deadlines Approaching
With the summer over and year end quickly approaching, many people are still asking whether the Corporate Transparency Act (“CTA”) applies to their company (or companies) and whether they really have to comply. The answers to those questions are: most likely and yes.
As discussed in previous client blasts, the CTA took effect on January 1, 2024 and, as discussed more fully below, compliance for all affected companies that were created before January 1, 2024 is due by [January 1, 2025]. Thus, most of the companies needing to comply only have a few short months to submit the required filings or potentially face both civil and criminal penalties - not only for the entity itself, but for any individuals that prevent such filings from occurring.
This broad sweeping Federal Act is part of the Anti-Money Laundering Act of 2020 enacted to combat money laundering and other financial crimes. The CTA requires many entities (“reporting companies”) not previously subject to reporting requirements to now disclose certain direct and indirect beneficial owners down to the individual level (i.e., human beings) along with additional related information. Subject to certain limited exemptions, any corporation, limited liability company or other entity created (or registered to do business) by the filing of a document with a secretary of state or similar office of any State or Indian tribe will need to file the required submission regarding beneficial ownership of the reporting company.
If you have a reporting company, you will then need to determine who the beneficial owners are to comply with the Beneficial Ownership Information Reporting Rule (“BOI Reporting Rule”). Beneficial Owners are people who either (i) exercise “substantial control” over the reporting company or (ii) own or control at least 25% of the ownership interests in the reporting company (directly or indirectly). Each person that meets one of these tests is a beneficial owner that needs to be reported to comply with the CTA. The 25% test is relatively straightforward, unless you have a complicated organization ownership chart. The “substantial control” test,
however, is broad sweeping and intended to capture any type of substantial control that may exist. Examples provided by the Financial Crimes Enforcement Network of the U.S. Department of Treasury (“FinCEN”) include senior officers (such as a president, CFO, GC, CEO, COO and others), anyone with the ability to appoint senior officers or a majority of the board of directors, anyone with the ability to direct or influence important decisions of the company (such as decisions regarding (x) the nature or scope of the reporting company’s business, selection or termination of business lines, (y) financing, selling, leasing or otherwise transferring assets of the reporting company, or (z) reorganizing the structure of a reporting company or amendments to the material governance documents such as articles of organization or operating agreements), and “any other form of substantial control over the reporting company.” This catch-all drives home the intent of the CTA that they want to know who is behind each entity in an attempt to root out terrorists and other bad actors from operating in the United States under the guise of being an ordinary business. Determining substantial control in trusts may present an additional complication if the grantor, beneficiary and/or trustee have varying levels of control over the trust.
While there are currently 23 exemptions to the BOI Reporting Rule, many of them apply to highly regulated businesses that are already subject to reporting obligations of the Federal government. The list of exemptions include securities reporting issuers, governmental authorities, banks, credit unions, broker/dealers, insurance companies, etc. As a result, the CTA places a heavy burden on smaller entities. However, we have found the large operating company exemption, the subsidiaries of certain exempt entities exemption (e.g., subsidiaries of large operating companies) and the exemption
If
you have any questions about the Corporate Transparency Act and how it impacts you, contact:
William Byers wbyers@rosenbergestis.com (212)
551-8456
for inactive companies to be somewhat useful for our clients. There are rules to these exemptions, of course, which you will need to be mindful of when determining whether or not your reporting company is exempt.
Failure to make these determinations and timely report the required information to FinCEN can result in both civil and criminal penalties. The willful failure to report such information, or the willful submission of incorrect or fraudulent information, can result in civil penalties of up to $591 for each day (adjusted annually for inflation) that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of a reporting company that fails to file a required BOI report may be held accountable for such failure. Further, a person may be subject to civil and/or criminal penalties if they willfully cause a reporting company not to file a required BOI report or to report incomplete or false information to FinCEN.
It is therefore imperitive to ensure that the BOI reports are filled out completely and correctly, and filed by the following deadlines:
• Reporting companies created or first registered to do business in 2024 will have 90 calendar days after such creation or registration to report such information to FinCEN.
• Reporting companies created or registered to do business on or after January 1, 2025, will have 30 calendar days after such creation or registration to report such information to FinCEN.
• Reporting companies created or registered to do business prior to January 1, 2024 will have until January 1, 2025 to report such information to FinCEN.
Therefore, with the end of the year quickly approaching, it is time to determine whether or not you have an entity that qualifies as a reporting company and, if so, prepare for the reporting requirements to avoid the penalties FinCEN is authorized to enforce.
R&E will be hosting a CTA Webinar on October 15, 2024, discussing important CTA facts deadlines that are approaching. More information, including registration details, will be announced soon.
Please contact William Byers at (212) 551-8456 or wbyers@rosenbergestis.com with any questions you may have or to assist you in preparing for these new reporting requirements.
Rosenberg & Estis, P.C. proudly announces the launch of the Firm’s Blog, positioning our attorneys to continue providing crucial and timely updates to our clients as well as our followers across social media.
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Inside R&E is a podcast hosted by New York City’s leading real estate attorneys who discuss current issues facing developers, owners and operators in the industry.
Inside R&E is the perfect way to kickstart your week in the New York real estate world. Inside R&E is available to stream on all major platforms including Apple Podcasts, Spotify, Amazon Music and Google Podcasts. Click here to listen and subscribe wherever you get your podcast.
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The Little-Known Connection Between Immigration Policy & Real Estate Law
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There are very few guarantees in life. Is your commercial guarantee one of them?
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Be Careful What You Stip For: ‘Liggett v. Lewitt Realty LLC’
The ruling from New York’s highest state court, although straightforward on its face, has important implications for both long-existing settlement agreements and when considering drafting future agreements settling disputes in the context of the Rent Stabilization Law.
As seen in the New York Law Journal
By Ethan R. Cohen
September 6, 2024
In June 2024, the Court of Appeals decided Liggett v. Lewitt Realty LLC, — NY3d –, 2024 NY Slip Op 03378 (2024), reversing the Appellate Division, First Judicial Department, and holding that a so-ordered stipulation of settlement entered into by a landlord and future tenant more than two decades ago, to settle a holdover proceeding in March 2000, was void as against public policy, and therefore could not provide a basis in the 2021 action for the landlord to establish that the subject apartment was properly deregulated from rent stabilization decades earlier. The ruling from New York’s highest state court, although straightforward on its face, has important implications for both long-existing settlement agreements and when considering drafting future agreements settling disputes in the context of the Rent Stabilization Law.
The case concerned an apartment that was initially subject to rent control, with Edward Brown listed as the rent-controlled tenant in 1984. When Brown died in 1998, with a monthly rent of just $141.23, the landlord commenced a summary holdover proceeding against the surviving occupant, Edward McKinney, who claimed a right to succeed to Brown’s rent-controlled tenancy. Generally, when a rent-controlled tenant dies or the apartment becomes vacant, either a permitted family member succeeds to the rent-controlled tenancy, or the apartment is decontrolled and becomes subject to rent stabilization. In the latter case, the initial rent-stabilized legal regulated rent for the apartment is required to be the first market rent agreed to by the landlord and the tenant in a lease agreement, subject to the tenant’s right to file a Fair Market Rent Appeal (FMRA) with the Division of Homes and Community Renewal (DHCR) challenging the rent as the actual fair market rent. The right to file a FMRA ensures that the first rent is a fair market rent.
Here, Lew Realty LLC disputed McKinney’s right to succeed to Brown’s rent-controlled tenancy. To settle the dispute, however, Lew Realty and McKinney agreed that McKinney would take the apartment as the first rent-stabilized tenant, and entered into a March 2000 stipulation settling the holdover proceeding, which was so-ordered by the Civil Court. The stipulation provided that $1,650 per month was the fair market rent for the apartment being removed from rent control, but that McKinney would accept a rent-stabilized lease at the preferential rent rate of $650 per month, which McKinney would pay for the duration of his tenancy, with allowable increases. Critically, the stipulation provided that McKinney agreed “not to challenge the rent,” thereby expressly waiving his rights held as the first rent-stabilized tenant to challenge the legal rent in a FMRA, which McKinney had no incentive to challenge in the first instance given his indefinite preferential rent. Lew Realty filed the lease and so-ordered stipulation with DHCR, with proof that it had mailed McKinney a notice of his right to file a FMRA, despite McKinney waiving such right in the stipulation.
McKinney vacated the apartment in 2001, and Lew Realty applied permissible vacancy and renovation rental increases authorized by the Rent Stabilization Law. The legal regulated
rent then exceeded the $2,000 threshold to luxury deregulate the apartment, removing it from rent-stabilization. Lew Realty then rented the apartment as a market apartment, ever since 2001.
Twenty years later, plaintiff Liggett was the market tenant of the apartment. When the landlord tried to increase her market rent, Liggett commenced an action in 2021 alleging that the March 2000 stipulation was void as against public policy both because: 1) it set the initial legal regulated rent at $1,650, an amount higher than the $650 rent that McKinney agreed to pay in the first lease; and 2) it expressly waived McKinney’s right to file a FMRA. Liggett sought a declaration that the apartment was still subject to rent stabilization and rent overcharge damages.
The lower court denied dismissal of the action. However, on appeal, the Appellate Division, First Judicial Department, reversed and dismissed the action in its entirety, holding, among other things, that the law’s protection that any agreement “by the tenant to waive the benefit of any provision of the RSL … is void” did not apply to McKinney, because he was not an established rent-stabilized tenant at the time he entered into the challenged stipulation.
The Court of Appeals reversed, holding, among other things, that the challenged stipulation was void because it expressly required McKinney to waive his right to file a FMRA, relying on the well-settled principle and Rent Stabilization Code regulation providing that any agreement “by the tenant” that waives any benefit of the Rent Stabilization Laws is void as against public policy, even if it benefits the tenant. The Court of Appeals further confirmed that this rule applies even if the individual entering into the agreement is not yet a tenant at the time of executing the agreement, settling the law in this regard, and holding: “McKinney’s status vis-à-vis the apartment has no bearing on whether the Stipulation was void. Rather, the Stipulation is void because it purports to waive a benefit of the rent laws.”
Notably, however, although Liggett challenged both the illegality of Lew Realty setting the initial legal rent higher than the preferential rent and the express waiver of McKinney’s right to file a FMRA in the stipulation, the Court of Appeals cited solely to the express waiver of rights to file a FMRA in the stipulation in holding that it was void. This express waiver of rights alone rendered the stipulation to be void “in its entirety.” Thus, the Court of Appeals did hold that the $1,650 legal rent was invalid, nor resolved the regulatory status of the apartment, but instead held that “[o]n remand, Lew Realty may rely on other reasons, apart from the Stipulation, to establish that the apartment was not rent stabilized when Liggett took tenancy, such as by establishing the fair rent of the apartment when it first entered rent stabilization in 2000 and applying subsequent allowable increases pursuant to the rent history.” Thus, the Court of Appeals left open the opportunity for Lew Realty to establish that $1,650 was the fair market rent in 2000.
The Court of Appeals also noted that, although Lew Realty registered the initial $1,650 legal regulated rent with DHCR decades earlier, and same had never been timely challenged, “there was no litigated proceeding before DHCR, and Lew Realty does not invoke collateral estoppel here,” citing to Gersten v 56 7th Ave. LLC, 88 AD3d 189, 201 [1st Dept 2011]). This note suggests that, had there been a prior administrative proceeding by a former tenant challenging the legal rent, where the validity of the Stipulation could have been raised, the Court of Appeals would have adhered to principles of administrative finality and the preclusive effect of prior administrative orders, notwithstanding the express waiver of rights in the Stipulation. This may provide a defense to practitioners litigating the legality or enforceability of challenged stipulations in the future.
Moreover, although the subject stipulation in this action was not challenged for more than 20 years, the Court of Appeals confirmed that, because a tenant is never barred by a limitations period from challenging the regulatory status of an apartment (i.e., whether an apartment is subject to rent control or rent stabilization, or was properly deregulated), as opposed to challenging his or her legal rent amount or a bringing a rent overcharge claim to recover monetary damages (which may be subject to a statute of limitations depending on the time of the challenged conduct), the tenant was not barred from challenging the decades-old stipulation in order to seek a declaration as to the rent-stabilized status of the apartment, despite concerns about the substantial delay. However, the Court of Appeals expressly stated that it did not address any issue as to the timeliness of the market tenant’s rent overcharge claim, which may still be barred by the statute of limitations, citing to precedent explaining the distinction between the limitations period applying to rent overcharge claims, but not governing claims as to regulatory status, which are never barred.
The decision provides a clear warning and guidance that any stipulation of settlement, to be enforceable, must never contain an express waiver of any rights held by tenants under the rent laws. However, the decision leaves open the question about whether the Court of Appeals would have still invalidated the two-decade-old so-ordered stipulation of settlement based solely upon the alleged illegality of the legal regulated rent agreed to therein (which rent was not challenged for 20 years), had the stipulation not contained an express waiver of the tenant’s rights to file a FMRA (which was seemingly unnecessary to accomplish the settlement in the first place). This nuance may provide guidance when practitioners are determining how to artfully draft future settlement agreements to accomplish the parties’ goals without running afoul of the brightline rule forbidding any express waiver of a tenant’s rights under the rent laws. However, in any event, the decision nevertheless invites challenges to any stipulations, no matter how old, that contain express waivers of rights, particularly where the stipulation affects the regulatory status of an apartment.
Defending a Co-op Against Derivative Claims: A Look Back to ‘Auerbach’
“Dismissing the derivative claims from the lawsuit can significantly change the posture of the litigation and substantially narrow the issues in the case,” writes Michael A. Pensabene of Rosenberg & Estis.
As seen in the New York Law Journal
By Michael A. Pensabene
August 9, 2024
Shareholder litigation commenced against boards of cooperative corporations is often brought both individually and derivatively on behalf of the corporation for good reason. The Business Corporation Law (BCL) broadly provides that a shareholder who is successful, in whole or in part, or who receives anything as a result of a judgment or settlement, in a derivative action, may be awarded reasonable expenses, including reasonable attorneys’ fees. BCL Section 626(e). In contrast, the attorneys’ fees provisions commonly found in proprietary leases (if any) are much narrower and limit recovery. Dismissing the derivative claims from the lawsuit can significantly change the posture of the litigation and substantially narrow the issues in the case, which can strengthen the board’s position and mitigate expenses. This article discusses a basis for seeking dismissal of derivative claims, which may be overlooked by practitioners.
Derivative claims, alleging that the board of directors breached a fiduciary duty to the corporation (i.e., caused harm to the corporation), belong to the corporation, not to the shareholder. It is not for one shareholder to decide whether it is in the best interest of the corporation to assert such a claim against the board. Derivative claims are permitted because a corrupt board, comprised of self-interested directors, would presumably not sue itself. However, independent, disinterested directors can decide whether the corporation should pursue a claim against the board, and they are better suited to do so, under the protections of the business judgment rule. The Court of Appeals established this precedent in the landmark case Auerbach v Bennett, 47 NY2d 619 (1979), and this precedent has been successfully applied to cooperative corporations. Ungerleider v One Fifth Ave Apt Corp, 164 Misc 2d 118, 120 (NY Sup Ct 1995).
Auerbach provides that a defendant board of directors may appoint a “special litigation committee” (SLC) consisting of disinterested independent directors to conduct a thorough investigation of a shareholder’s derivative claim. If the SLC finds the claim to be meritless, or not in the corporation’s interests to assert, the court will defer to the SLC’s decision and grant a summary judgment motion to dismiss the claim on those grounds. Under the business judgment rule, the court cannot question the SLC’s decision to seek dismissal of the derivative claim. Rather, the court’s inquiry is limited to just an examination of whether the members of the SLC were “disinterested and independent,” and whether the SLC conducted an “appropriate and sufficient” investigation of the derivative claim. Auerbach, 47 NY2d at 620.
The underlying facts of Auerbach are important to understanding this principle. A publicly traded corporation, General Telephone & Electronics, conducted an internal preliminary investigation to ascertain whether the corporation made questionable payments to public officials and political parties. The audit revealed that the corporation had, in fact, made payments constituting bribes and kickbacks amounting to $11 million, which the corporation, in turn, reported to the Secu-
rities and Exchange Commission (SEC). Immediately after the SEC filing, Auerbach, a shareholder of the corporation, commenced a derivative action against the directors on the board asserting that the directors are liable for breach of their duties to the corporation and should be made to account for payments made in those transactions.
Immediately after the derivative claim was filed, the board formed the SLC, consisting of just three of the 15 directors comprising the board. These three directors, who joined the board after the challenged transactions occurred, were vested with the “authority of the Board of Directors to determine, on behalf of the Board, the position that the corporation shall take with respect to the derivative claims alleged on its behalf.” Id at 625. After a seven-month investigation, the SLC concluded that “no proper interest of the corporation or its shareholders would be served by the continued assertion of a claim against it.” Id at 625. The SLC found that there was no breach of duty, that none of the directors profited personally, and that the derivative claim had no merit. Notwithstanding that kickbacks and bribes did occur, the SLC determined that, “if the action were allowed to proceed, the time and talents of the corporation’s senior management would be wasted on lengthy pretrial and trial proceedings, that litigation costs would be inordinately high in view of the unlikelihood of success, and that the continuing publicity could be damaging to the corporation’s business.” Id at 626.
Finding that there was no evidence of bad faith or fraud in Auerbach, the Court of Appeals granted summary judgment dismissing the derivative claims, holding that the SLC’s determinations must be respected because “courts are ill equipped to evaluate what are and must be essentially business judgments.” Id at 630. Since the SLC determined that it is in the corporation’s best interests to terminate a plaintiff’s derivative claims, the business judgment rule “bars judicial inquiry into the actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate processes.” Id at 629.
This procedure to evaluate and seek dismissal of derivative claims was followed by a cooperative board with similar success in Ungerleider v One Fifth Ave Apt Corp, 164 Misc 2d 118 (NY Sup Ct 1995). Deferring to the SLC’s judgment, the Ungerleider court found that “[a]s to what has been uncovered and the relative weight accorded in evaluating and balancing the several factors and considerations are beyond the scope of judicial concern.” Id at 121. However, “[w]hile the substantive aspects of a decision to terminate a shareholder’s derivative action against defendant corporate directors appointed by the corporation’s board of directors are beyond judicial inquiry under the business judgment doctrine, the court may inquire as to the disinterested independence of the members of that committee and as to the appropriateness and sufficiency of the investigative procedure chosen and pursued by the committee.” Id at 120.
The Ungerleider court found that the cooperative board demonstrated both the “disinterested independence” of the SLC’s members and that the SLC’s investigation was “appropriate and sufficient.” The board submitted proof that each of the three members of the SLC were not related to any of the individual defendants in the action, they were not employed by or engaged in any business relationship with the individual defendants, and they were not members of the board during the time periods at issue in the litigation. The SLC reviewed the complaint and litigation papers, it hired independent counsel who investigated, and had counsel prepare a report of counsel’s findings. The SLC reviewed the report, met with counsel, and then determined that prosecution of the derivative claims was not in the interest of the cooperative. Id at 120-121. The shareholder plaintiff did not submit any roof to raise an issue of fact as to the disinterested independence of the members of the committee; and the proof submitted by plaintiff was insufficient to raise an issue of fact to demonstrate that “the investigation has been so restricted in scope, so shallow in execution, or otherwise so pro forma or half hearted as to constitute a pretext or sham. Id at 121; citing Auerbach, 47 NY2d at 620.
This standard was also followed in Lichtenberg v. Zinn, 260 A.D.2d 741 (3rd Dept 1999); however, it is noteworthy that the trial court held the motion to dismiss in abeyance until after discovery was completed. Although the timeliness of the board’s motion to dismiss was not raised on appeal in Lichtenberg, requiring a board to complete discovery before the motion is considered would seemingly defeat the purpose of forming an SLC under the principles of Auerbach
Regarding discovery, the Court of Appeals in Auerbach did not find there was any affidavit in the record asserting that essential facts may exist which could be obtained by disclosure, and the shareholder did not otherwise identify any particulars to be sought in discovery concerning the disinterestedness of the SLC members or the procedures it followed. The court held “[t]o speculate that something might be caught on a fishing expedition provides no basis to postpone decision on the summary judgment motions under the authority of CPLR 3212(f).” Auerbach v Bennett, 47 NY2d 619, 637. This ruling reversed the Appellate Division, Second Department, which found that a nonfrivolous derivative action should not be foreclosed at the threshold before the plaintiff has been afforded the opportunity of pretrial discovery and examination before trial. Auerbach v. Bennett, 64 A.D.2d 98, 107-108. Accordingly, the completion of full discovery on the merits, as contemplated by the Second Department, is not warranted, but the Court of Appeals did not preclude discovery altogether. Rather, discovery may be necessary only if the plaintiff raises substantive issues concerning the alleged disinterested independence of the SLC or the appropriateness and sufficiency of its investigation, which demonstrates a need for further factual investigation, short of a fishing expedition.
Interestingly, just days before the Court of Appeals decided Auerbach, the Appellate Division, First Department, decided Byers v. Baxter, 69 A.D.2d 343 (1st Dept 1979), which reversed the dismissal of a derivative claim, without prejudice to renew, upon the completion of very limited discovery. The Byers court opined that “[s]urface formalities may be only a device for concealing the impropriety of the corporation’s decision not to sue,” while recognizing that “disclosure proceedings can become extremely extensive in stockholder suits, so as to nullify a large part of the advantage that a disinterested board of directors, acting in good faith, may legitimately seek to accomplish by resolution to terminate the action.” Id at 348. Accordingly, the Byers court granted the plaintiff limited discovery solely as to “the validity and propriety of the board of directors’ resolution in determining to terminate this action and not the underlying merits,” which was to be completed expeditiously. Id at 349-350.
The Ungerleider court determined that the cooperative board’s motion to dismiss the derivative claim was ripe for adjudication because the plaintiff did not demonstrate that further discovery was necessary. The action was pending for nearly two years and a substantial amount of discovery has been completed, including defendants’ production of over 8,000 pages of materials, an architect’s production of about 3,000 pages of material, and several examinations before trial. Plaintiff failed to identify any particulars of his desired discovery relating to the disinterestedness of the members of the special litigation committee or the procedures followed by that committee. Ungerleider v One Fifth Ave Apt Corp, 164 Misc 2d 118, 121.
In conclusion, a cooperative board may consider utilizing a SLC to seek the dismissal of derivative claims asserted by a shareholder. The SLC must be comprised of disinterested independent directors who have full authority to conduct an appropriate and thorough investigation of the claims. Provided that the formation of the SLC, and the methods it uses, are known or otherwise disclosed to the plaintiff, the board should be successful dismissing the derivative claims from the litigation by moving for summary judgment on the basis that the SLC wants to terminate the claims.
Retroactively Reshaping the Analysis of Succession Rights: When Does a Tenant Permanently
Vacate an Apartment?
Gary Rosenberg and Ethan Cohen explore the part of bill S-2980-C in which the Legislature retroactively defined when a tenant is considered to have “permanently vacated” a rent-stabilized apartment for purposes of determining succession rights for family members, which was previously undefined by the Legislature.
As seen in the New York Law Journal
By Gary M. Rosenberg and Ethan R. Cohen
August 6, 2024
In prior articles in August 2023 and February 2024, we explored how the New York State Legislature had recently passed bills that retroactively defined the “fraud exception” to the pre-HSTPA four-year statute of limitations and lookback rule for rent overcharge claims, raising issues about the constitutionality of legislation that retroactively defines provisions of law, while purporting to clarify prior law.
These issues will potentially be addressed by the New York State Court of Appeals next year in actions in which leave to appeal has already been granted, including Burrows, et al. v. 75-25 153rd Street LLC and Aras, et al. v. B-U Realty Corp., et al
Following the theme of retroactive definitions, this article explores a different facet of the same initial bill, S-2980-C, pursuant to which the Legislature retroactively defined when a tenant is considered to have “permanently vacated” a rent-stabilized apartment for purposes of determining succession rights for family members, which was previously undefined by the Legislature.
In doing so, the Legislature upended more than a decade of consistent caselaw in the First Judicial Department on which landlords and tenants have relied to determine their rights, but on the other hand, purportedly resolved a split in the First and Second Judicial Departments regarding this issue.
Yet, because this new definition necessarily applies retroactively to past conduct, often where such conduct is more than a decade old, it again raises issues about the constitutionality of legislation that retroactively defines operative provisions of law.
Generally, pursuant to, inter alia, New York Public Housing Law §14(4)(a) and Rent Stabilization Code §2523.5(b)(1), a family member of a rent-stabilized tenant is entitled to succeed to the rent-stabilized rights of the tenant where the tenant “has permanently vacated” the apartment and the family member has co-resided with the tenant in the apartment as a primary residence for at least two years “immediately prior to the permanent vacating” of the apartment by the tenant (or a period of at least one year where such person is a senior citizen or a disabled person).
If the family member co-resided with the tenant of record for the requisite time period immediately prior to the tenant “permanently vacating” the apartment, the family member is entitled to be named as a rent-stabilized tenant on the renewal lease that was offered to the tenant.
Therefore, the date on which the tenant of record is considered to have “permanently vacated” an apartment is critical to determining succession rights.
In the First Department, a mountain of caselaw, since at least 2012—affirmed by the Appellate Division in 2019 and
2021—has consistently held that a tenant of record who moves out of an apartment but continues to sign and return renewal leases to the landlord and/or pay rent in his or her own name “cannot be found to have permanently vacated [an] apartment at any time prior to the expiration of the last lease renewal” that he or she signed (Well Done Realty, LLC v. Epps, 177 AD3d 427 [1st Dept 2019]; see 186 Norfolk LLC v. Euvin, 192 AD3d 414 [1st Dept 2021]; Third Lenox Terrace Assoc. v. Edwards, 91 AD3d 532 [1st Dept 2012] [“although the apartment was no longer her primary residence after 1998, Cynthia, having continued to pay the rent and execute renewal leases extending through November 2005, cannot be found to have permanently vacated the apartment at any time prior to the expiration of the last lease renewal on November 30, 2005”]; GVS Properties IV LLC v. Marte, 66 Misc3d 139[A] [App Term, 1st Dept 2020]; Sonora Assoc. LLC v. Valencia, 66 Misc3d 148[A] [App Term, 1st Dept 2020]; West 48th Holdings LLC v. Herrera, 66 Misc3d 150[A] [App Term, 1st Dept 2020]; Diagonal Realty LLC v. Arias, 66 Misc3d 150[A] [App Term, 1st Dept 2020]; 206 W. 104th St. LLC v. Zapata, 45 Misc3d 135(A) [App Term, 1st Dept 2014]; 525 W. End Corp. v. Ringelheim, 43 Misc3d 14 [App Term, 1st Dept 2014]; Extell Belnord LLC v. Eldridge, 42 Misc3d 143[A] [App Term, 1st Dept 2014]; PS 157 Lofts LLC v. Austin, 42 Misc3d 132(A) [App Term, 1st Dept 2013], appeal dismissed 25 NY3d 1186 [2015]; BCD Delancey LLC v. Jian Gou Lin, 42 Misc3d 132[A] [App Term 2013]; 360 W. 55th St., L.P. v. De George, 36 Misc3d 126(A) [App Term, 1st Dept 2012]; William 165 LLC, v. Ser-Boim, 68 Misc3d 771 [Civil Ct, New York County 2020]; 90 Elizabeth Apt. LLC v. Eng, 58 Misc3d 300 [Civ Ct, New York County 2017]; RSP UAP-3 Prop. LLC v. Schulz, 2017 NY Slip Op 32859[U] [Civ Ct, Bronx County 2017]; ST-DIL LLC v. Kowalski, 2015 NY Slip Op 31713[U] [Civ Ct, New York County 2015]).
In all of these cases, family members who did not timely assert succession rights when the tenant of record actually moved out were unable to establish succession rights many years or more than a decade later, because they could never establish that they co-resided with the tenant for the two years prior to the tenant permanently vacating at the expiration of the last signed renewal lease—as the tenant admittedly did not reside in the apartment for those years.
The effect of these holdings was that, if a tenant moved out of an apartment but, instead of a family member asserting succession rights, the tenant continued to execute renewal leases and/or pay rent in his or her own name, the tenant vitiated the succession claim of the family member by not timely advising the landlord that they had vacated. This resulted in consistent summary judgment rulings denying succession rights in the First Department, often more than a decade after the tenant vacated.
As one court explained the reasoning: “[T]he claim must still be timely asserted after the vacatur date…The reason behind this is twofold. First, under the Code, the burden
is on the successor tenant to assert said right…Second… the Code contemplates that these issues will be addressed when the lease comes up for renewal after the tenant of record vacates…However, if a succession claim is not timely asserted, it tends to impair a landlord’s ability to investigate and prosecute its rights…” (Malone v. Sapinsky, 31 Misc3d 1239(A) [Civ Ct, New York County 2011] [citations omitted] [emphasis supplied]).
In the Second Department, however, in Matter of Jourdain v. New York State Div. of Hous. & Community Renewal, 159 AD3d 41 (2d Dept 2018), lv dismissed 24 NY3d 1009 (2019), the Appellate Division disagreed with the First Department, holding that, although the language of the operative statute and regulation is ambiguous, and could support the First Department’s reading, “we conclude that…DHCR intended the ‘permanent vacating of the housing accommodation by the tenant’ to mean the time that the tenant permanently ceased residing at the housing accommodation, and that the mere execution of a renewal lease and the continuation of rent payments by the tenant after the tenant permanently ceases to reside at the housing accommodation does not extend the relevant time period.”
Thus, in the Second Department, the relevant time period in which a family member must reside with the tenant is the period prior to when the tenant ceases actually residing in the apartment, regardless of whether the tenant continued to signed renewal leases.
In 2023, the Legislature passed S-2980-C, which was signed into law in December 2023. Therein, the Legislature amended Public Housing Law § 14(4)(a) to provide that: “‘permanently vacated’ shall mean the date when the tenant of record permanently stops residing in the housing accommodation regardless of subsequent contacts with the unit or the signing of lease renewals or continuation of rent payments.”
In turn, DHCR amended Rent Stabilization Code §2523.5(b) to provide that: “A tenant shall be considered to have permanently vacated the subject housing accommodation when the tenant has permanently ceased residing in the housing accommodation. The continued payment of rent by the tenant or the signing of renewal leases shall not preclude a claim by a family member…in seeking tenancy.”
This new definition vitiated more than a decade of caselaw in the First Department, on which landlords have relied in determining their rights and investigating claims. In S-2980-C, the Legislature provided that this new definition applies to “all pending proceedings,” which means that it purportedly applies retroactively in pending cases.
Moreover, even in future cases that have not yet been commenced, the law necessarily applies retroactively to past conduct in such cases because it applies where the tenant of record vacated many years, or even a decade, earlier, but continued to sign renewal leases.
Until now, landlords in the First Department relied on the consistent caselaw holding that they need not investigate or be able to produce records establishing that a family member did not actually reside with a tenant many years, or a decade, earlier.
However, under the new retroactive definition, a landlord who relied on this case law may now be required to litigate whether a family member resided with a tenant at any time in the past, even more than a decade ago, instead of during the two years prior to the most recent renewal lease.
For example, in GVS Properties IV LLC v. Marte, 66 Misc3d 139(A) (App Term, 1st Dept 2020), the tenant moved out in 2003, but continued to sign renewal leases until 2016. In Third Lenox Terrace Assoc. v. Edwards, 91 AD3d 532 (1st Dept 2012), the tenant moved out in 1998, but continued to pay rent and sign renewal leases extending through 2005.
In Sonora Assoc. LLC v. Valencia, 66 Misc3d 148(A) (App Term, 1st Dept 2020), the tenant moved out in 1983, but continued to sign renewal leases until 2018. In West 48th Holdings LLC v. Herrera, 66 Misc3d 150(A) (App Term, 1st Dept 2020), the tenant moved out in 2004, but continued to execute renewal leases until 2017. In 206 W. 104th St. LLC v. Zapata, 45 Misc3d 135(A) (App Term, 1st Dept 2014), the tenant moved to Puerto Rico in the 1990s, but continued to sign renewal leases until 2006. In all of these cases, and many more, succession rights were denied, but the analysis would be entirely different under the new law. The new retroactive definition of “permanently vacated” would have likely changed the result in all of the above First Department cases, and required the landlord to litigate whether a family member co-resided with a tenant more than a decade ago. However, until now, landlords in the First Department did not believe they needed to keep decades of records or investigate decade-old claims to preserve the ability recover apartments from tenants.
Notably, in Matter of Regina Metro. Co., LLC v. New York State Div. of Hous. and Community Renewal, 35 NY3d 332 (2020), the Court of Appeals held that portions of the HSTPA were unconstitutional as applied retroactively to past conduct, including because it would “upend[] owners’ expectations of repose relating to conduct that may have occurred many years prior,” particularly where landlord “reasonably relied on pre-HSTPA statutory and regulatory provisions to destroy records,” and because “application of the amendments to past conduct would not comport with retroactivity jurisprudence or requirements of due process.”
A similar analysis could apply here, and will likely be litigated in the years to come. To wit, a Landlord who listened to the First Department for a decade may now suddenly be stuck disputing whether a family member co-resided with a tenant of record more than a decade ago, which may be all but impossible to prove or disprove, rather than litigating whether
a family member co-resided with the tenant of record only within the two years prior to the expiration of the most recent renewal lease.
However, even if the new law applies retroactively, the issues of waiver and laches may prevent family members from belatedly asserting succession rights years or a decade later. Courts generally hold that “where an occupant does not timely assert a succession claim, it is generally deemed waived” (Malone v. Sapinsky, 31 Misc3d 1239(A) [Civ Ct, New York County 2011], citing South Pierre Assoc. v. Mankowitz, 17 Misc3d 53 [App Term, 1st Dept 2007]; see Third Lenox Terrace Assoc., 23 Misc3d 126 [A] [“To ensure the fair and orderly resolution of succession disputes, the governing Code provision contemplates the timely interposition of succession claims”]). This should remain true whether or not the definition of “permanently vacated” has changed–but the application of these principles, and the constitutionality of the new retroactive definition of “permanently vacated” as applied to past conduct, is yet to be seen.
Moreover, due to the Legislature’s retroactive change in the definition of “permanently vacated,” the Legislature has potentially rendered many family members’ succession claims to be barred by the applicable statutes of limitations, including the six-year statute of limitations for a declaratory relief action, contract claim, enforcing a statutory right, or any action for which no limitation is specifically prescribed.
Namely, by the new definition, the Legislature has now provided that the family members’ succession claim matured and accrued when the tenant actually vacated the apartment, which may be more than six years ago in many cases, including in most of the cases cited above.
Before the new law, the family members’ succession claim did not accrue in the First Department until the tenant permanently vacated at the expiration of the last signed renewal lease, but now, the Legislature has deemed the succession claim as maturing and accruing many years or a decade earlier, when the tenant actually stopped residing in the apartment.
Therefore, there will be many cases now where the Legislature has rendered a family members’ succession claim to be time-barred by changing the definition of “permanently vacated” for purposes of succession. Indeed, a succeeding family member is only entitled to be named on the renewal lease following the permanent vacature of tenant, but in cases where the tenant vacated many years ago, the tenant has already signed the renewal lease and subsequent renewal leases.
The Legislature has certainly weaved a tangled web here, without necessarily considering these issues. Notably, however, the new definition of “permanently vacated” has already been applied in at least one case in the First Department, by the Civil Court of Bronx County in Owl Creek Properties, LLC v. Timmons, Index No. L&T 302566/21.
Keys To Strong Parking, Storage Contracts For NYC Buildings
It is essential that cooperative and condominium managers and boards carefully review their storage and parking agreements to ensure all necessary terms and remedies are included.
Indeed, in a recent case in the Civil Court of the City of New York, it was affirmed that an owner could utilize the remedy of self-help eviction to remove a nonresidential occupant — thus avoiding the prolonged process of litigating in housing court or other forums — as long as the eviction is done peaceably and where the underlying license agreement expressly permits such a remedy.
Parking and storage units are valuable amenities in New York City’s co-op and condo buildings and an impermeable agreement can minimize legal exposure and potential headaches for the Board and management.
The License Agreement
As seen in the Law360
By Adam Lindenbaum and Matthew E. Eiben
July 10, 2024
In buildings where the parking and storage units are not owned by the individual occupying them, the use of the units should be governed by a written license agreement. It is crucial to ensure that the agreement maintains its status as a license rather than a lease, as leases create additional legal hurdles and potential tax implications. Here are key tips for crafting an unambiguous license agreement.
Refer to the agreement as a license and define the parties as “licensee,” the resident using the unit, and “licensor,” the cooperative or condominium.
Include a clause to allow either party to terminate the agreement for any reason or no reason with specific notice, e.g., 30 days’ email notice.
Define any monetary payments as license “fees” instead of “rent.”
Essential Terms of the License Agreement
Clearly identify the unit with an ID number and location on an annexed diagram.
Define the term of the agreement, monthly or annually, and provide for automatic renewals to avoid tracking expiration dates.
State the license fee and include a provision allowing fee changes during the term upon notice to the resident.
Detail permissible and prohibited uses, such as banning the storage of valuables, combustible materials, perishables, scented items, liquids and living items.
Include a risk clause with language stating that storage is at the resident’s own risk.
Limit use to owners only, excluding nonowners, subtenants, guests and nonresidents.
Enforcing the License Agreement: The Remedy of Forcible Reentry
The first step in enforcement is to review the agreement for specific procedures or notice requirements regarding early termination.
For storage or parking license agreements, after serving any and all notice defaults required under the license agreement, self-help can be a viable enforcement option.[1]
Self-help allows landlords to forcibly regain possession of the licensed premises without a formal eviction process, provided it is explicitly permitted in the agreement and executed without breaching the peace, i.e., in a manner that is likely to cause physical or verbal altercations. This method is cost-effective and expedient, but must be carefully executed to avoid potential liability.
On March 22, the Civil Court of the City of New York held in AYU New York Inc. v Premier 225 Tenth Avenue LLC that an owner of a commercial condo unit had every right to change the locks on a space licensed for use by an art gallery when it failed to respond to a three-day notice of termination for nonpayment of license fees. The owner was able to act through the “remedy of self-help,” as was expressly permitted in the parties’ license agreement.
The petitioner in AYU sought to be restored to possession on the ground that its ouster from the licensed premises was forcible. However, for reentry to be forcible it must constitute a breach of the peace, be conducted in an unruly manner or threaten violence.
The court held that the ouster did not breach the peace, where it occurred after business hours. In fact, the court noted that licensee had admitted in its petition that it was not aware the ouster had occurred until the following morning — thus confirming that the ouster had been effectuated without any breach of peace.
The remedy of self-help is infrequently used in New York because courts generally disfavor the application by commercial landlords as it effectively results in the tenant’s forfeiture of the premises without affording the tenant the opportunity to adjudicate their right to continued possession. This judicial stance arises from the principle that tenants should be entitled to due process, ensuring any disputes regarding occupancy are resolved through the judicial system rather than unilateral landlord actions.
Self-help carries risks, such as claims of property damage or loss. Engaging a licensed and bonded moving or towing company to remove the property and storing it for 30-60 days
is advisable. Further, it is advisable to provide the licensee with repeated written notice to ensure they have ample opportunity to remove their property before any forcible reentry.
In some cases, a formal eviction proceeding may still be necessary, particularly if the resident does not live in the building or is unlikely to receive default notices, or the property is valuable or difficult to remove.
Conclusion
Drafting and enforcing parking and storage unit license agreements are essential tasks for co-op and condo boards in New York City. Clear, fair and legally sound agreements help maintain the value and functionality of building amenities while protecting residents’ interests.
The Often Overlooked NY Foreclosure Notice Requirements
As seen in the Law360
By Christopher Gorman and John Muldoon
July 2, 2024
Much of the attention in the commercial mortgage foreclosure arena is focused upon what are, by now, well-documented issues in the office building asset class. Not to be overlooked, however, is mounting data suggesting a great deal of softness in the multifamily residential real estate asset class as well.
Impending maturity dates, rising interest rates and tenant issues are creating headaches for the owners of multifamily residential real estate. These headaches may very well spill over into loan defaults and, ultimately, a wave of foreclosure litigation. Indeed, the data suggests that lenders are seeing mounting defaults for these reasons, and potentially others, in the multifamily residential real estate asset class.
While many of the legal issues that pertain to foreclosures of other commercial asset classes (e.g., office buildings) would apply with equal force to the foreclosure of a multifamily residential building, there is at least one statute with applicability in the multifamily residential foreclosure context that is often overlooked, to the potential detriment of both lenders and borrowers.
That frequently overlooked statutory notice provision is New York Real Property Actions and Proceedings Law Section 1303, and its tenant notice requirements can apply in both the residential and commercial mortgage foreclosure context
Section 1303’s tenant notice provisions require, among other things, that tenants be served with a notice, specifying the typeface, font, language and color of the paper on which the notice should be printed, among other things. The stated legislative purpose underscoring Section 1303’s tenant notice requirements is “to protect tenants who may not be aware of their rights or even the pendency of the action.”
Section 1303’s tenant notice requirements have not garnered much attention from litigants or the courts alike, as those requirements have only been the subject of a handful of court decisions since the statute’s enactment more than a decade ago. As detailed below, however, litigants, whether lenders or borrowers, ignore the tenant notice requirements of Section 1303 at their own peril.
On the lender side, the law is clear that proper service of the Section 1303 notice upon the tenants is critical where the statute applies because it is a condition precedent to the commencement of a covered foreclosure action, and noncompliance mandates dismissal of the complaint. Further, it is the lender’s burden to demonstrate compliance with Section 1303 and the failure to do so as part of the lender’s prima facie case mandates denial of a dispositive motion, such as a motion for summary judgment.
On the borrower side, as set forth below, courts have, generally speaking, afforded an expansive and protective interpretation to the tenant notice requirements of Section 1303, often siding with those defending a foreclosure action where the specific tenant notice requirements have not been strictly adhered to.
Borrowers, therefore, particularly in commercial mortgage foreclosure actions where the statute may be applicable and defenses may otherwise be at a premium, should be verifying compliance with the tenant notice requirements if they are in search of a defense that can delay the prosecution of a foreclosure action or event result in its dismissal.
Set forth below is an overview of some of the requirements of Section 1303’s tenant notice provisions that have garnered the most attention from litigants and the courts alike, with an emphasis on the pitfalls and perils that can await the litigant who is not prepared to ensure that the statute’s tenant notice requirements are adhered to at the outset of certain foreclosure actions.
The Scope of Applicability of Section 1303’s Tenant Notice Requirements
Section 1303(1) requires that the foreclosing party provide notice of a mortgage foreclosure action to, among others, any tenant of residential real property. Section 1303 itself does not define what constitutes residential real property.
The term “residential real property,” however, is defined in Section 1305, which provides that “[r]esidential real property ‘shall mean real property … improved by any building or structure that is or may be used, in whole or in part, as the home or residence of one or more persons, and shall include any building or structure used for both residential and commercial purposes.”
Given the breadth of the definition of what qualifies as residential real property, since the statute’s enactment, courts have ruled that the statute applies to a wide array of properties subject to a foreclosure action.
For instance, in 650 Brooklyn LLC v. Hunte, the Kings County Supreme Court concluded in 2015 that Section 1303’s tenant notice requirements applied to cover a three-story mixed-use building composed of two apartments and a store.[1] The Supreme Court held in Hunte that Section 1303 “requires service of the specified notice on ‘any tenant of a dwelling unit’ without regard to the size or occupancy of the dwelling.”
In other words, it is irrelevant that the subject building has a dedicated commercial space, as the definition of residential real property, by its express terms, applies to “real
property … that is or may be used, in whole or in part, as a home residence.”
The statute, therefore, applies to a wide range of multifamily residential real property, as well as mixed-use property (i.e., containing both a commercial and residential component), located within New York state. For instance, the statute has been deemed to apply to literally hundreds of thousands of properties within New York City containing both ground floor retail as well as residential apartment units located above the ground floor retail, among many other types of mixed-use property.
The Tenant Notice Must Be on Different Colored Paper Than the Summons and Complaint
The notice requirements in Section 1303 are so exacting that even the slightest misstep can defeat a foreclosure action, including the color of the paper on which the notice is printed. Section 1303(4) requires that the notice “shall be printed on colored paper that is other than the color of the summons and complaint.”
In Bank of America NA v. Lauro, the Appellate Division, Second Department, concluded in 2020 that a defendant raised a triable issue of fact by challenging the color of the paper, “as he asserted in his affidavit that the notice with which he was served ‘was on white colored paper, the same color papers as the summons and complaint.’”[2] In Lauro, the process server submitted an affidavit attesting that the notice was printed on yellow paper, but the challenge to the color of the paper raised by the borrower-defendant was deemed sufficient to create an issue of fact depriving the lender of summary judgment.
Thus, although the issue of whether the color of the paper on which the tenant notice was printed is different from the summons and complaint may seem trivial and otherwise easy to prove, that borrowers have been able to prevail on such an issue only emphasizes the need for the lender to ensure strict compliance with Section 1303’s tenant notice requirements.
The
Manner of Service of the Tenant Notice
The method of service of the Section 1303 tenant notice depends upon two main factors: (1) how many units are in the building; and (2) whether the plaintiff knows the identity of the tenants.
Whether the building has five or more units determines how the notice must be served. For buildings with five or more dwelling units, “a legible copy of the notice shall be posted on the outside of each entrance and exit of the building.”[3]
For buildings with five or less units, service is dictated by whether the plaintiff knows the identity of the tenants, which is obviously a standard that has the potential to be fraught with issues. The Section 1303 notice shall be delivered to the tenant by certified mail, return receipt requested, and by first-class mail to the tenant’s address at the property if the identity of the tenant is known to the plaintiff, and by first-class mail delivered to “occupant” if the identity of the tenant is not known to the plaintiff.[4]
The plain language of the statute mandates that notice must be provided to any tenant. Courts have interpreted such language to mean that, regardless of whether the tenant is or is not named as a defendant in the foreclosure lawsuit, the tenant is still entitled to a notice in compliance with Section 1303.[5]
Additionally, even if the foreclosing party strictly complies with the notice requirements, mortgagors and tenants are not without recourse. Section 1303(4)’s method of service is dependent upon whether the foreclosing party knows the identity of the building’s tenants.
Accordingly, in at least one case, the defendant successfully challenged service of the Section 1303 notice on the ground that the foreclosing party knew the identity of all the building’s tenants, yet still failed to comply with the statute’s service requirements applicable under such circumstances.
In Merrill Lynch Credit Corp. v. Nicholson, the Appellate Division, Second Department, concluded in 2022 that the plaintiff “failed to submit any evidence … that it was not aware of any tenant’s identity”; the defendant, in contrast, submitted affidavits in opposition to the plaintiff’s motion for summary judgment stating that the mortgage loan servicer “was aware” of the tenant in the property.[6]
Under those circumstances, the court in Nicholson concluded that the “affidavits thus raised triable issues of fact as to whether [the plaintiff] was aware of the identity of a tenant at the subject property and failed to comply with RPAPL 1303(4) by sending him the required notice by certified mail.”
The Statute’s 10-Day Service Requirement
While in many respects, the Legislature drafted Section 1303 in exacting detail to ensure strict compliance with its purpose (e.g., the exact words to be used in the notice), one area in which the Legislature did not make the route to compliance abundantly clear is with respect to Section 1303(4)’s 10-day requirement.
Section 1303(4) only states, in relevant part, that “[t] he notice to any tenant … shall be delivered within ten days of the service of the summons and complaint.” Yet,
despite courts holding that a plaintiff must strictly comply with all of the requirements of the statute, Section 1303(4) does not specifically address when the 10 days begins to run, as in, what defendant must be served for the 10-day clock to begin to run.
This confusion is only compounded by the fact that, as most foreclosure practitioners know, there are often times many necessary defendants named in a foreclosure action, all of whom, typically speaking, are served at various different times after an action is commenced.
It is not clear, based on the language of the statute itself, if the clock begins to run when the first defendant is served in the action, or whether this clock begins to run once a certain class of defendant (e.g., a defendant with an ownership interest in the subject property) is served. Best practice, therefore, would dictate serving the Section 1303 notice as soon as possible to avoid unnecessary litigation over the above.
Evidentiary Issues in Showing Compliance With the Statute
In addition to complying with the statutory requirements imposed by Section 1303, the foreclosing party must also confront several demanding evidentiary hurdles courts have imposed in order to demonstrate compliance with the statute.
Commonly, foreclosing plaintiffs will attempt to demonstrate compliance with Section 1303 service by submitting an affidavit of service. While an affiant alleges that he provided the purported notice, the court is required to view the actual notice to determine whether the foreclosing party has complied with the statutory requirements imposed by Section 1303.
When submitting an affidavit, plaintiffs often fail to establish that the documents served upon the defendant conformed to the form and substance required by Section 1303 or that the documents served were the correct documents. Rather, as courts have held, an affidavit of service typically demonstrates that documents were served on a particular date to a particular address, not that those documents complied with the requirements of Section 1303.
For instance, in 21st Mortgage Corp. v. Nodumehlezi, the Appellate Division, Second Department, held in 2022 that the foreclosing party failed to proffer sufficient evidence establishing that it complied with the Section 1303 tenant notice requirements, concluding that an affidavit of service coupled with a copy of the notice with the e-filed pleadings and related documents was insufficient to demonstrate compliance.[7]
Similarly, the Appellate Division, Second Department, in Flagstar Bank FSB v. Hart, concluded in 2020 that the process server’s affidavit alone failed to demonstrate that the foreclosing party complied with Section 1303. [8] Rather, as the court concluded in Hart, the process server’s affidavit demonstrates statutory compliance if it is accompanied with a copy of the Section 1303 notice or averments that the notice served complied with the requirements of Section 1303 concerning context and form.
Along that same vein, in MTGLQ Investors LP v. Assim,[9] the Appellate Division, Second Department, held in 2022 that actual notice must additionally prove that the correct typeface was used on the notice, pursuant to Section 1303(2) and (4). In that case, the process server’s affidavit failed to indicate that the correct typeface was used.
Conclusion
The foregoing is intended to illustrate the challenges faced by foreclosing parties in meeting the evidentiary requirements and other burdens imposed by the courts in showing compliance with Section 1303’s tenant notice requirements. While a number of the requirements of the statute seem simple enough when taken at face value to comply with, the reported decisions addressing Section 1303’s tenant notice requirements show that it may be more challenging than one might expect for lenders to show compliance with the statutory requirements.
The reported decisions discussed herein, if nothing else, serve as a reminder that courts scrutinize each step of the foreclosure process, emphasizing the importance of strict compliance with Section 1303.
Yet, despite these holdings, based upon a review of the reported decisions and dockets for mortgage foreclosure cases currently pending before New York state courts, it does not appear that many borrowers are raising these issues and/or making these arguments as of yet in cases where the statute applies, including those involving the foreclosure of a mortgage secured by multifamily residential real property.
These arguments, however, certainly will be forthcoming from borrowers in cases covered by the statute in the months ahead based upon the current distress in the real estate markets, including multifamily and mixed-use real estate markets, where Section 1303’s tenant notice requirements are applicable.
The anticipation of more and more borrowers raising these issues, and lenders forced to confront the issues raised by the borrowers, of course, provides all the more reason why an understanding of what it takes to comply with the Legislature’s strict mandates is critical for lenders and borrowers alike.
1. 47 Misc.3d 885 (Sup. Ct. Kings Cnty. 2015).
2. 186 A.D.3d 659 (2d Dep’t 2020).
3. RPAPL § 1303(4).
4. Ibid.
5. Hunte, 47 Misc.3d at 895-96.
6. 210 A.D.3d 758 (2d Dep’t 2022).
7. 211 A.D.3d 893 (2d Dep’t 2022).
8. 184 A.D.3d 626 (2d Dep’t 2020).
9. 209 A.D.3d 1006 (2d Dep’t 2022).
Understanding Good Cause Eviction: The Basics
On April 20, 2024 the Good Cause Eviction Law (GCE) was signed into law. Basically, it limits unreasonable rent increases for units that are not already subject to rent regulation, ensures that existing tenants of unregulated apartments are offered renewal leases, and curbs the eviction of free-market tenants except if the owner has “good cause.” This article will explore the origins of GCE and explain its key components.
As seen in the New York Law Journal
By Gary M. Rosenberg and Anthony J. Virga June
6, 2024
As most New Yorkers now know, on April 20, 2024 the Good Cause Eviction Law (GCE) was signed into law as part of the 2024-2025 New York State budget legislation. GCE is codified in the new Article 6-A of the New York State Real Property Law (“RPL”) and took effect immediately.
At its core, GCE limits unreasonable rent increases for units that are not already subject to rent regulation, ensures that existing tenants of unregulated apartments are offered renewal leases, and curbs the eviction of free-market tenants except if the owner has “good cause.” This article will explore the origins of GCE and explain its key components.
The Backdrop for GCE
The concept of good cause eviction is not new. In fact, New Jersey adopted a form of good cause eviction in 1974 with the passage of the Anti-Eviction Act (N.J.S.A. 2A:18-61.1).
The New Jersey Anti-Eviction Act limits rent increases for residential units and sets forth 17 distinct grounds as good cause for the eviction of a residential tenant.
In 2019, both Oregon and California passed similar statutes to address what the legislatures in those States believed was a housing crisis. Oregon’s Statewide Rent Control Law (Oregon Senate Bill 608) limits rent increases in any 12-month rolling period to 7% plus the Consumer Price Index (CPI), and places restrictions on the termination of both month-to-month and fixed-term tenancies. California’s Tenant Protection Act (Civil Code §§ 1946.2 and 1947.12), which was recently amended in April 2024, prohibits rent increases of more than 5% plus the change in CPI or a total of 10%, whichever is lower, in any 12-month period, and provides that tenants can only be evicted for “just cause” in specific circumstances. GCE was clearly inspired by these regulations.
The notion of good cause eviction made its debut in New York in January 2019 with Senate Bill S2982 (“S2982”). That bill stalled. In February 2021, Senate Bill S3082 (“S3082”) was introduced. The sponsors of S3082 explained in the bill’s justification section that good cause eviction is necessary in New York because “[l]andlord’s across the state displace tenants in order to gain higher profits,” and that “de facto evictions happen, among other ways, via non-renewal of their leases.”
The sponsors also believed that the “bill would set a precedent of placing the lives, health, safety, and well-being of tenants first, and before the profits of landlords.”
S3082, like S2982 before it, proposed the creation of a new Article 6-A in the RPL, four limited exemptions to the law’s applicability, eight grounds as good cause for the eviction of an unregulated tenant, and limits on unreasonable rent increases, defined as a rent increase in any calendar year that exceeds either 3% of the previous rent or 1.5% of CPI, whichever is higher.
Although S3082 did not become law, GCE adopted many of the concepts contained in the bill, as well as the overall premise that unregulated tenants need protection from rent increases and “no cause” evictions.
However, as demonstrated below, GCE is not as restrictive as S3082. Specifically, GCE provides for 15 exemptions to applicability, 10 grounds for good cause eviction, and limits on unreasonable rent increases in any calendar year, defined as the lower of either 5% plus the change in CPI, or 10% of the previous rent.
Applicability to Existing Residential Units
Except where an exception applies, GCE covers all existing residential units located within New York City (RPL §212), as well as to those in any village, town, or city in the State that adopts the provisions of GCE through a local law (RPL §213).
The following are the 15 exceptions where GCE does not apply in New York City (RPL §214): (1) where the building in which the unit is located is owned by an owner that owns no more than 10 units in the State and/or has a beneficial interest in entities owning no more than 10 units in the State; (2) a unit in an owner occupied building with no more than 10 units; (3) units that are sublet where the sublessor seeks to recover the unit for personal use and occupancy; (4) units where the occupant’s occupancy is incident to the occupant’s employment and that employment was or will be lawfully terminated; (5) units already subject to rent regulation or eviction protection under any local, state, or federal law; (6) units subject to affordability requirements pursuant to statute, regulation, restrictive declaration or regulatory agreement; (7) units within a building that is owned as a cooperative or condominium, or that is subject to an offering plan submitted to the Attorney General; (8) units or buildings for which a temporary or permanent certificate of occupancy was issued on or after January 1, 2009 for a period of 30 years following issuance of such certificate; (9) units used as seasonal use dwelling units; (10) units located in a hospital, continuing care retirement community, assisted living facility, adult care facility, senior residential community, and not-for-profit independent retirement communities; (11) manufactured homes on or in a manufactured home park; (12) hotel rooms or other transient use covered by the definition of a class B multiple dwelling; (13) school dormitories; (14) units or buildings that are used as a religious facility or institution; and (15) units for which the monthly rent is greater than 245% of the fair market rent (“FMR”) for the county in which the unit is located, as published by the New York State Division of Housing and Community Renewal (DHCR).
On May 3, 2024, DHCR issued the first “Good Cause Eviction Law Required DHCR Notice” (the “DHCR Notice”), setting forth the 245% FMR for the City’s five boroughs (the numbers are the same for all the boroughs). 245% FMR is $5,846 for a studio apartment, $6,005 for a 1-bedroom apartment,
$6,742 for a 2-bedroom apartment, $8,413 for a 3-bedroom apartment, and $9,065 for a 4-bedroom apartment.
Good Cause Defined
As the name implies, GCE requires landlords to have good cause to evict a tenant and prohibits landlords from recovering possession or excluding tenants from possession, regardless of whether the tenant has a valid lease, unless good cause is shown (RPL §215).
There are 10 grounds for a good cause eviction (RPL §216): (1) the failure to pay rent provided that the failure did not result from an unreasonable rent increase (which is explained in more detail below); (2) breach of a substantial obligation of tenancy after the expiration of a 10-day written notice and an opportunity to cure; (3) nuisance conduct that interferes with the comfort or safety of the landlord or other tenants in the same or adjacent buildings or where the tenant is maliciously or by gross negligence damaging the unit, the building, or the real property; (4) occupancy that is in violation of or causes a violation of law and the landlord is subject to civil or criminal penalties, provided that an agency of the municipality or State issues a vacate order and the Court finds that the violation cannot be cured unless the tenant vacates and the landlord did not create the condition necessitating the vacate order by neglect, intentional act, or failure to act; (5) the tenant is using the unit, building or other part of the real property for an illegal purpose, (6) failure to provide access for necessary repairs or improvements required by law or to show the unit to prospective purchasers, mortgagees or others having a legitimate interest therein; (7) recovery for landlord’s personal use as its principal residence or for the use of landlord’s family members as defined in the statute, provided that the landlord can prove by clear and convincing evidence its good faith intention to do so and the tenant in possession is not 65 or older or a disable person; (8) the landlord has a good faith intention to demolish and proves it by clear and convincing evidence; (9) the landlord has a good faith intention to withdraw the “housing accommodation” from the rental market, and proves it by clear and convincing evidence; and (10) Tenant’s refusal to agree to reasonable changes to a renewal lease, including, but not limited to, a reasonable rent increase, provided that the proposed changes were sent to the tenant no more than 90 and no less than 30 days prior to the expiration of the lease term.
GCE provides that there is a rebuttable presumption that a rent increase is unreasonable if the rent has been increased in any calendar year by more than 5% plus the change in CPI, as published by DHCR, or 10%, whichever is lower (the “Local Rent Standard”) (RPL §216).
The DHCR Notice provides that CPI for New York City is 3.82% for this year. Therefore, there is a rebuttable presumption that a rent increase is unreasonable if the rent is increased by more than 8.82% this year.
The court may consider all relevant facts to determine if the rent increase is reasonable, including, but not limited to, fuel and other utility costs, insurance, maintenance, increases in property tax expenses and significant repairs.
Significant repairs include structural repairs, electrical, plumbing, or mechanical repairs requiring a permit, abatement of hazardous materials, such as lead paint, asbestos or mold, but excluding cosmetic repairs such as painting and decorating.
New GCE Notice Requirements
Simultaneously with the passage of GCE, the Governor also signed into law the new RPL §231-c, which requires landlords to send or incorporate a “Good Cause Eviction Law Notice” (the “GCE Notice”) with every initial lease, renewal lease, notice of rent increase or nonrenewal pursuant to RPL §226c(1), statutory 14-day rent demand pursuant to Real Actions and Proceeding Law (“RPAPL”) §711(2), and petition pursuant to RPAPL § 741. The GCE notice must advise the tenant, among other things, (i) whether the unit is exempt from GCE and the basis for exemption, (ii) if the unit is subject to GCE and the landlord intends to increase the rent above the Local Rent Standard, the justification for the increase, and (iii) if the unit is subject to GCE and landlord is electing not to renew the lease, the basis for such non-renewal.
The provisions of RPL §226 and RPAPL §§ 711(2) and 741 were also amended to require that the GCE Notice be appended to or incorporated into the RPL § 226-c notices, statutory rent demands, and petitions.
The requirement to send or incorporate the GCE notice does not take effect until August 18, 2024 (120 days from the effective date of the Act). All the new provisions relating to GCE outline above are set to expire on June 15, 2034, unless extended.
Conclusion
For better or worse, GCE is now the law in New York City and landlords will have to learn to navigate the new requirements. As with all new areas of regulation, much of the uncertainty and/or ambiguities in the law will be clarified through the course of litigation over the next several years or when new legislation is introduced.
Legislative Relief for Ground Lease Cooperatives: The Next Phase of Rent Regulation
As seen in the New York Law Journal By Deborah E. Riegel May 6, 2024
(with contributions of Michael Fortugno)
Perhaps the greatest uncertainty associated with ownership in a residential ground lease cooperative corporation is the question of ground rent escalations. Where the cooperative corporation leases the land on which a building has been constructed, in addition to traditional maintenance expenses for the operation of the building, shareholders are also responsible for their proportionate share of the ground rent due to the owner of the land. The method by which increases in ground rent are determined is a matter of contract, which varies by the terms of the individual ground lease. Because such increases are typically driven by market factors, rather than a fixed rent schedule, the increases are unpredictable. In December 2023, Senator Liz Krueger introduced Senate Bill 7825, to create a new Section 223-c of the Real Property Law which, if enacted, would (1) limit rent increases under residential cooperative ground leases; (2) entitle residential ground lease cooperative corporations to renew a ground lease for the same period as the expiring term, subject to the terms of the proposed legislation as to rent increases; (3) permit residential ground lease cooperative corporations to incur indebtedness or borrow money, notwithstanding any restrictions in a residential cooperative ground lease, to pay or fund additional rent (defined in the bill as amounts spent to comply with the residential cooperative ground lease for the payment of real estate taxes, insurance, repair, maintenance, including that required by the FISP program implemented by the city of New York or other municipalities, or for capital improvements to the residential ground lease apartment building); and (4) grant residential ground lease cooperative corporations a right of first refusal if the land owner intends to sell or otherwise transfer its interest in the property, all as more fully set forth below.
The sponsor’s memorandum of support justifies this legislation as a means of preserving what she describes as housing occupied by “middle-income residents on fixed incomes,” notwithstanding that her Senate district encompasses some of the wealthiest zip codes in Manhattan. Cooperative corporations and their shareholders allege that they are subjected to unpredictable and frequently significant rent increases when ground rents reset. Land owners oppose the bill as not only legislative overreach into an arm’s length commercial contract, but also an unconstitutional violation of the contracts clause of the U.S. Constitution. It is worth noting that from a pure economic perspective, purchasers of residential ground lease cooperative apartments historically pay a fraction of the price that the same apartment would command in a residential cooperative that is not subject to a ground lease, precisely because of potential ground rent increases. To achieve the sponsor’s purpose, the bill prohibits annual increases in base rent payments (defined as any payments, other than additional rent, due to be paid under the applicable ground lease) which, exceed the greater of 3% or the consumer price index (maximum annual rent increase percentage). However, to the extent that an annual increase in base rent, when added to increases in additional rent paid during the prior year, exceeds the maximum annual rent increase percent-
age, the increase is capped and such excess carries forward to the following year. In the event the ground lease provides for increases in base rent on a periodic basis less frequently than annually, the increase in base rent for such period, when taken together with the amount of any increase in additional rent, may not exceed more than the compound increase that results from applying the maximum annual rent increase percentage for each applicable year above the base rent for the prior year in effect.
As such, owners of ground lease real property are subject to unbargained for limitations on rent increases, notwithstanding the extent to which expenses, including, most significantly real estate taxes, may exceed the maximum annual rent increase percentage. Put another way, the bill shifts the burden of increases in land costs to the owner of ground lease real property, rather than the shareholders who enjoy the use of that property. In addition, by combining the maximum annual rent increase within a right for the residential ground lease cooperative to perpetual renewals, the bill also eliminates any possibility that the owner will be able to recover any lost revenue and simultaneously devalue the land for sale or other conveyance. Residential ground lease cooperatives would also have the right to incur indebtedness and/or borrow money where the primary purpose for such money is to help pay or fund additional rent or otherwise perform repairs, maintenance, or other capital improvements to the building. Many ground leases restrict leasehold financing, such that residential ground lease cooperative boards are faced with imposing special assessments as their only means of capital funding. With the increasing regulatory requirements on all cooperative corporations, including residential ground lease cooperatives, such as the costs associated with façade repairs, LL97 compliance and other regulatory schemes, an effort to make traditional financing available to residential ground lease cooperatives is intended to relieve the short term burden on shareholders ad permit the cooperative corporation to fund necessary repairs and improvements through institutional financing.
While this may appear to have a less direct impact on landowners, to the extent that this provision also permanently overrides the bargained for terms of the residential cooperative ground lease and allows a residential ground lease cooperative to encumber the apartment building in which the landowner has a reversionary interest, it is also problematic. The bill further mandates that a residential ground lease cooperative will have the absolute right to (1) renew its ground lease on the same terms and conditions, subject to the aforementioned rental increase limitations, at any time prior to or within ninety days after having received written notice from the ground-lease owner of the expiration of or termination of the ground lease, for a term equal to the length of the expiring term; and (2) exercise a right of first refusal, where the owner proposes a sale or transfer of an interest in the ground lease real property. The ground lease owner must provide the residential ground lease cooperative with written
notice containing the price and all other terms and conditions of the proposed transfer and the residential ground lease cooperative would have the right to purchase the interest being conveyed at the same price and on “substantially” similar terms and conditions.
What constitutes “substantially” similar terms is not specified, and also is likely to engender litigation. For example, if an owner is presented with an “all-cash” offer to close “as-is” within 60 days, are the terms of purchase substantially similar if the cooperative corporation requires financing? Where a 60 day closing is proposed, but the bill gives a cooperative board 120 days to notify the owner of its intention to exercise its rights, can that exercise be on substantially similar terms when the owner must continue to bear the ground lease real property expenses for an additional four months? These, and the other issues that will inevitably arise, are likely to be subject to litigation. This bill follows the Legislature’s stated intention of increasing tenant protections, which began in 2019 with the enactment of the Housing Stability and Tenant Protection Act (HSTPA), and most recently includes the enactment of Good Cause Eviction, which limits rent increases for rental units not otherwise subject to rent regulation. Ironically, the maximum annual rent increases here are substantially lower than even those ultimately approved by the Legislature when it enacted Good Cause Eviction. While federal courts have, to date, declined to strike down rent regulation embodied in the HSTPA almost five years after its enactment, litigation over its constitutionality persists. Further, just as the U.S. District Court for the Southern District of New York held that the Guaranty Law, enacted during the COVID-19 pandemic, ostensibly to provide relief to small business owners, violated the Contracts Clause, this bill facially suffers from the same infirmities. The court invalidated the Guaranty Law in Melendez v. City of New York, 668 F.Supp.3d 184 (SDNY, March 31, 2023), based on, among other reasons, its conclusion that (1) the law was permanent, rather than temporary in nature; (2) placed the economic burden exclusively on landlords; (3) did not condition the relief on any financial need or hardship; and (4) made no effort to compensate landlords, who were asked to solely shoulder this burden, while retaining the obligation to continue to pay their taxes and expenses without the contractually agreed upon income. It is not difficult to anticipate a challenge which applies the Melendez analysis to this proposed legislation, with potentially the same results. Just as with the Guaranty Law, this bill seeks to permanently modify residential cooperative ground leases while placing the burden solely on the landowner, without compensation. It similarly applies to all residential ground lease cooperatives regardless of need or hardship—whether on the Upper East Side or in the Bronx. As such, while cooperative boards and shareholders stand to benefit from the passage of this legislation and will certainly look to it to standardize expenses associated with residential cooperative ground leases, those benefits are far from assured and may only be achieved after years of litigation, with the associated expenses borne by the shareholders.
NYC’s Unfair Property Tax
A discussion of the recent
case Tax Equity Now
NY LLC v. City of New York which presents a critical examination of New York City’s property tax system by the New York Court of Appeals.
As seen in the New York Law Journal By Benjamin M. Williams April 2, 2024
The case of Tax Equity Now NY LLC v. City of New York (2024 NY Slip Op 01498), decided on March 19, 2024, presents a critical examination of New York City’s property tax system by the New York Court of Appeals. This lawsuit raised fundamental questions about the equity, legality, and methodology of property taxation in New York City, challenging the system’s compliance with both statutory and constitutional mandates.
Background
Tax Equity Now NY LLC (TENNY) is an association committed to reforming what it perceives as inequities and illegalities in New York City’s property tax system. The lawsuit filed by TENNY against the City of New York and the Department of Finance (DOF), along with the State of New York and the State Office of Real Property Tax Services, aimed at addressing these concerns.
TENNY’s allegations centered on the argument that New York City’s property tax system resulted in significant inequities, imposing unequal tax bills on properties of similar value. This system, according to TENNY, did not accurately reflect the properties’ fair market values, thereby violating the statutory and constitutional requirements for uniformity and fairness in taxation within property classes.
Legal Framework and Issues
The court’s analysis began with an overview of the statutory framework governing property tax assessments in New York City, specifically referring to the Real Property Tax Law (RPTL) sections that limit annual increases in tax assessments for certain classes of property. The legislature created these caps to protect certain homeowners from sudden spikes in their property tax obligations due to market fluctuations or reassessment processes. The court also analyzed the RPTL sections that require co-operative and condominium properties to be valued like rental properties.
The lawsuit specifically challenged the methodology used by the DOF to calculate property tax assessments, arguing that it resulted in a regressive tax structure unfairly burdening owners of less valuable properties in majority-people-of-color areas. TENNY’s complaint highlighted systemic inequities and alleged that the current system perpetuated housing segregation, violated equal protection and due process clauses of both State and Federal Constitutions, and contravened the federal Fair Housing Act (FHA).
The Court’s Decision
The Court of Appeals reviewed the legal and constitutional underpinnings of the property tax system, acknowledging the inherent complexities and the legislative intent to balance equity with practical considerations in tax assessment processes.
Significantly, the court concluded that the complaint had sufficiently articulated claims under RPTL 305 (2) and the FHA
against the city with respect to class one and two properties, demonstrating potential violations warranting further examination. These findings suggest that certain aspects of the tax system may indeed contravene legal standards for equitable treatment and fair market valuation of properties for taxation purposes. The lower courts will now have to decide.
Conversely, the Court found that other causes of action, including those alleging violations of equal protection and due process clauses, did not meet the threshold for stating a claim.
Dissent
The dissent argued against the majority’s interpretation of the RPTL and FHA claims, asserting that the majority’s reading of the statutes and the pleading requirements for a claim were incorrect. They contend the complaint does not meet the legal standards to allege statutory violations effectively, particularly criticizing the majority’s understanding of RPTL 305 (2) and its requirements for uniform tax assessments. The dissent emphasizes the importance of legislative processes in addressing tax policy issues rather than judicial intervention, suggesting that the complexities of tax reform should be resolved through political, not legal, means.
Implications
This decision by the New York Court of Appeals does not resolve all questions surrounding New York City’s property tax system. By allowing claims under RPTL 305 (2) and the FHA to proceed, the Court opens the door for a more thorough examination of how property taxes are assessed, which may encourage DOF to change its assessment methodologies and legislators to rewrite the property tax laws to make them more fair.
The case of Tax Equity Now NY LLC v. City of New York reflects ongoing debates over the fairness, legality, and effectiveness of the property tax system. It highlights the tension between laws designed to ensure tax equity and the practical outcomes of their implementation, setting the stage for future continued legal challenges and potential reforms in property taxation
Retroactively Redefining ‘Fraud’: The Chapter Amendments
An update on the status of Assembly Bill A-6216-B and Senate Bill S-2980-C and the significant changes to the original text of Part B of the bill that are expected to be passed by the Legislature soon using “chapter amendments.”
As seen in the New York Law Journal By Gary M. Rosenberg and Ethan R. Cohen February 6, 2024
In our August 2023 article, we discussed how the New York State Legislature had just passed a controversial bill, Assembly Bill A-6216-B and Senate Bill S-2980-C (the “bill”), on the last day of the legislative session in June 2023. Part B of the bill was particularly problematic on its face because, in 2023, it purported to retroactively redefine the standard for establishing the “fraud exception” to the four-year statute of limitations and four-year “lookback rule” for rent overcharge claims under the “pre-HSTPA” law.
This law is only applicable to conduct occurring prior to June 14, 2019. The “fraud exception” effectively provides an exception to the entire “pre-HSTPA” statutory scheme for determining rent overcharge claims.
Thus, in 2023, the bill sought to amend the law applying to conduct occurring prior to June 2019, raising substantial questions about the bill’s constitutionality and whether it would be signed into law by the governor.
At the time of the prior article, the bill had not yet been presented to the governor. This article provides an update on the status of the bill, and the significant changes to the original text of Part B of the bill that are expected to be passed by the Legislature soon using “chapter amendments.”
Despite being passed by the Senate on June 20, 2023, the bill was not presented to Governor Kathy Hochul for more than five months, leaving the industry unsure and speculating as to the bill’s fate. On Dec. 22, 2023, however, more than six months after the Legislature passed the bill, Governor Hochul signed the bill into law, but only after negotiating significant “chapter amendments” to the bill with the Legislature, including substantial changes to Part B of the bill.
“Chapter amendments” are changes to the text of a bill that are negotiated by the governor and the Legislature after the bill is already passed by the Legislature. The Legislature then agrees to introduce and pass the negotiated changes as a new bill in the next legislative session in exchange for the governor agreeing to sign the current bill into law now.
Chapter amendments can be minor, technical fixes or substantial changes to the substantive law passed by the Legislature. Therefore, they provide a mechanism for the governor to entirely change a bill as passed by the Legislature, without vetoing the bill or causing the Legislature to start over.
Rather than vetoing the bill, the governor can negotiate and agree upon “chapter amendments” with the Legislature to be introduced and passed in the next legislative session. However, the negotiated chapter amendments do not take effect until they are actually passed by the Legislature and signed into law. Therefore, adding to the confusion, when signed by the governor, the bill as written actually becomes the law until the chapter amendments are passed, leaving the applicable law in a state of limbo, particularly when the chapter amendments substantially change the bill, as here.
To understand the impact of Part B of the bill, and the changes negotiated via chapter amendments, some background is required. On June 14, 2019, the New York State Legislature effected a monumental overhaul of the rent laws by enacting the Housing Stability Tenant Protection Act of 2019 (the “HSTPA”).
However, in April 2020, in Matter of Regina Metro. Co., LLC v. DHCR, 35 NY3d 332 (2020) (“Regina”), the New York State Court of Appeals held that rent overcharge claims that are based on a landlord’s conduct that occurred prior to June 14, 2019 must be determined under the laws existing at the time of the conduct, the “pre-HSTPA law.”
The court’s reasoning was straightforward—retroactive application of new laws to conduct that occurred before the new laws existed would be unconstitutional, particularly because the prior laws provided landlords with “clear repose” for conduct that had occurred more than four years before a rent overcharge claim, via the four-year statute of limitations and lookback rule.
Under pre-HSTPA law, rent overcharge claims were subject to a strict four-year statute of limitations and four-year “lookback rule.” Pre-HSTPA law provided that a tenant must bring a rent overcharge claim within four years of the first overcharge alleged or else their claim was time-barred, and that a tenant could not challenge their rent more than four years after a landlord registered it with DHCR (the four-year statute of limitations).
Pre-HSTPA law further provided that, when a tenant commenced a rent overcharge claim, the Court could not “lookback” earlier than the rent registered or actually charged four years before the tenant commenced the rent overcharge claim, known as “the base date,” in order to determine the legal rent (the four-year lookback rule). This statutory scheme provided landlords with repose from liability for stale conduct that occurred more than four years ago, unless there was “fraud.”
Many rent overcharge cases that are still being commenced and/or litigated today, including several class actions, concern conduct that occurred prior to June 14, 2019, and therefore, are governed by pre-HSTPA law.
The only exception to the pre-HSTPA statute of limitations and lookback rule is known as the “fraudulent deregulation scheme” exception, or “fraud exception,” for short. The “fraud exception” provides that, where a tenant makes a “colorable claim of fraud” by producing evidence of a landlord’s “fraudulent scheme to deregulate” an apartment that taints the reliability of the rent on the base date, then the court can review that apartment’s rental history beyond the four-year lookback period to determine if the landlord had engaged in a fraudulent scheme to deregulate, and in cases of fraud, a tenant can recover overcharges for an otherwise time-barred claim.
If, upon looking back, the court finds that a landlord engaged in a “fraudulent scheme to deregulate an apartment” that tainted the reliability of the rent on the base date, then the Court (or DHCR) must use DHCR’s punitive “default formula” to determine the legal rent, which generally drastically reduces a tenant’s rent and results in substantial overcharge damages. Therefore, what elements are required for a tenant to establish the “fraud exception” is of the utmost importance.
In Regina, the Court of Appeals held that establishing “fraud” for purposes of establishing the “fraud exception” to pre-HSTPA law is no different than any other context, holding that the “fraud exception” requires a tenant to establish the elements of common law fraud, explaining: “Fraud consists of “evidence [of] a representation of material fact, falsity, scienter, reliance and injury.”
Indeed, even as codified, the exception required a “fraudulent scheme to deregulate,” which necessarily requires fraud. This standard finally provided courts with a bright-line rule for assessing and applying the “fraud exception”—simply, the fraud exception required fraud.
After the Court of Appeals decided Regina, New York State Supreme Courts and Appellate Courts began to consistently apply this common law fraud standard to assess what elements a tenant must prove to establish fraud as an exception to the pre-HSTPA law. However, years after the courts began to consistently apply the standard concerning the elements that a tenant must prove to establish the “fraud exception” to the “pre-HSTPA” law, the Legislature passed the bill in June 2023 to retroactively “define clearly” the standard for establishing the “fraud exception” to pre-HSTPA law, stating that the Court of Appeals had it wrong.
As stated in the legislative findings of the bill, “in light of court decisions…including Regina Metro v. DHCR, it is public policy that the legislature define clearly the scope of the fraud exception to the pre-HSTPA four-year rule for calculating rents which remains unsettled and the subject of litigation where courts have diverged from the controlling authority… to impose a common law fraud standard that is…inconsistent with the intent of the legislature…” The bill continued, “it is therefore public policy that the legislature codify, without expanding or reducing the liability of landlords under pre-HSTPA law, the standard for applying that exception.” Yet, this fraud exception has existed since at least 2005, so “defining” it in 2023 is problematic.
The bill, as passed by the Legislature, states:“With respect to the calculation of legal rents for the period either prior to or subsequent to June 14, 2019, an owner shall be deemed to have committed fraud if the owner shall have committed a material breach of any duty, arising under statutory, administrative or common law, to disclose truthfully to any tenant, government agency or judicial or administrative tribunal,
the rent, regulatory status, or lease information, for purposes of claiming an unlawful rent or claiming to have deregulated an apartment, whether or not the owner’s conduct would be considered fraud under the common law, and whether or not a complaining tenant specifically relied on untruthful or misleading statements in registrations, leases, or other documents
However, this standard effectively deems any violation of any duty to automatically be fraud, even if the elements of fraud are not established, thereby providing an exception to the pre-HSTPA statute of limitations and lookback rule in every case.
As already recognized by the Court of Appeals in Regina, “an exception predicated on the fact that the base date rent was higher than what would have been permitted under the RSL…would swallow the four-year lookback rule. In every overcharge case, the rent charged was, by definition, illegally inflated—otherwise there would be no overcharge.” In effect, this would retroactively eliminate the entire pre-HSTPA scheme, which is exactly the result that the Court of Appeals held to be unconstitutional in Regina.
Apparently, the governor agreed that Part B of the bill, as passed by the Legislature, was problematic, as predicted in our prior article. Therefore, before signing the bill into law, the governor negotiated chapter amendments with the Legislature, which entirely changed the text of Part B, eliminating the above language.
The “chapter amendments” have now been introduced in the next legislative session as Assembly Bill A08506. In the chapter amendments, the above quoted text from Part B is entirely deleted, and replaced with the following:
“Section 2 of part B of a chapter of the laws of 2023 relating to defining clearly the scope of the fraud exception to the pre-HSTPA four-year rule for calculating rents, as proposed in legislative bills numbers S. 2980-C and A. 6216-B, is amended, and a new section 2-a is added to read as follows:
When a colorable claim that an owner has engaged in a fraudulent scheme to deregulate a unit is properly raised as part of a proceeding…a court of competent jurisdiction or the state division of housing and community renewal shall issue a determination as to whether the owner knowingly engaged in such fraudulent scheme after a consideration of the totality of the circumstances. In making such determination, the court or the division shall consider all of the relevant facts and all applicable statutory and regulatory law and controlling authorities, provided that there need not be a finding that all of the elements of common law fraud, including evidence of a misrepresentation of material fact, falsity, scienter, reliance and injury,
were satisfied in order to make a determination that a fraudulent scheme to deregulate a unit was committed if the totality of the circumstances nonetheless indicate that such fraudulent scheme to deregulate a unit was committed.”
Therefore, if and when the chapter amendments are passed, Part B of the bill will no longer deem any violation of any duty to automatically constitute fraud, which is a step in the right direction (although, until passed, Part B as originally written is now the law).
Instead, the chapter amendments will now require a court to review “the totality of the circumstances” to determine whether a landlord “knowingly engaged” in a fraudulent scheme to deregulate. However, the chapter amendments expressly state “there need not be a finding that all of the elements of common law fraud, including evidence of a misrepresentation of material fact, falsity, scienter, reliance and injury, were satisfied,” rejecting the Court of Appeals’ straightforward holding in Regina that the “fraud exception” to the pre-HSTPA law requires actual fraud.
However, while rejecting this common law fraud standard, critically, the chapter amendments negotiated by the governor do not state or provide any guidance as to what elements do need to be satisfied to meet fraud standard under pre-HSTPA law, leaving it entirely undefined, again.
Rather, the chapter amendments merely provide that the “totality of the circumstances” must “indicate” that a fraudulent scheme to deregulate a unit was knowingly committed, without providing any further guidance or clarification.
This purportedly “clearly defined” standard for establishing the “fraud exception” under pre-HSTPA law is noticeably ambiguous and imprecise, sending the law back into a state of uncertainty and inconsistency, which the common law fraud standard had eliminated.
The bill, and the chapter amendments, will likely face the same legal challenges that parts of the HSTPA failed to overcome, because they retroactively “define” the standard for what is required to establish an exception to the entire pre-HSTPA statutory scheme. However, because the Legislature is purporting only to clarify prior law, the outcome of such legal challenges remains unclear.
What is clear is that the much-needed consistency that was finally emerging in pre-HSTPA “fraud” cases will again fall to confusion, and more litigation. While the intention of the chapter amendments is to “define clearly” the “fraud exception,” they seemingly do the opposite, eliminating the bright-line rule and leaving it to the courts to assess whether the totality of the circumstances “indicate” that an owner committed a fraudulent scheme to deregulate.
Local Law 97: Condominium and Cooperatives Facing Unique Financing Challenges
As many building owners in New York City know, Local Law 97 went into effect on Jan. 1, 2024. It is an aggressive plan to cut harmful emissions in New York City by requiring, with some rare exceptions, buildings in excess of 25,000 square feet to reduce their carbon emissions by 40% in 2030 and 80% in 2050.
By Adam R. Sanders February 2, 2024
As many building owners in New York City know, Local Law 97 went into effect on Jan. 1, 2024. It is an aggressive plan to cut harmful emissions in New York City by requiring, with some rare exceptions, buildings in excess of 25,000 square feet to reduce their carbon emissions by 40% in 2030 and 80% in 2050.
While there are still many evolving nuances to the guidelines, we know the timeline for affected covered buildings to comply has begun. However, owners of certain qualified buildings may elect to undertake and complete “prescriptive energy conservation measures” by Dec. 31, 2024.
A current list of such prescriptive measures is set forth in the regulations, but some of those measures include, without limitation, new windows, replacing and repairing HVAC systems, integrating solar energy, adding proper insulation and weatherizing and air sealing buildings. All buildings (regardless of whether they must begin coming into compliance on Jan. 1, 2024, or later) must be in compliance with the 2030–2034 standards by 2030.
Among those grappling with the challenge of bringing their building into compliance are condominiums and cooperatives. Aging condominiums and cooperative buildings are saddled with outdated energy systems and infrastructure. For example, most pre-war buildings use boilers to supply apartments with heat through steam heat systems. To comply with Local Law 97 energy efficiency standards, building owners need to switch to electric heat pumps. This is a costly switch for middle and low-income condominium and co-op owners and is proving to be an extraordinary burden.
Although Local Law 97 contemplated the affordability difficulties for Housing Development Fund Cooperatives and Mitchell-Lama buildings by offering delayed compliance pathways, many other private affordable cooperative and condominium associations do not enjoy such delayed compliance.
The effect of this is widespread. According to the 2022 Covered Buildings List published by the NYC Department of Sustainable Buildings, over 18,000 multifamily properties are affected by Local Law 97. Of those multifamily properties, about 10,000 buildings are classified as being built prior to 1940. This is significant, as older pre-war buildings face practical challenges when retrofitting energy upgrades and a steeper path to compliance due to age.
Paying for and financing Local Law 97 compliance projects will be difficult for condominiums and cooperatives, given their ownership structure. Available financing methods include allocating costs to maintenance or common charges, charging special assessments, drawing from cash reserves, and taking out loans. Unfortunately, no method is perfect, and they all have unique challenges.
If a condominium or co-op board decides to allocate the capital costs through a special assessment, there will likely be significant pushback from residents. Energy-efficient upgrades are, unsurprisingly, very costly. The special assessment to make the necessary upgrades will require a few large payments over a short period of time, placing a significant burden on unit owners and shareholders. There also remains the possibility that such large assessments would deter prospective buyers from buying into the building.
Further issues arise when unit owners or shareholders cannot afford to make such a significant monthly payment. One possible solution is for a board to identify a “preferred lender” willing to pre-qualify a building and offer home equity lines of credit (HELOC) to shareholders or unit owners who prefer to finance their obligations.
Alternatively, boards may seek to borrow capital to finance energy improvements. It is common for cooperatives to borrow money because a cooperative corporation owns its real property, which can be offered as collateral. Borrowing by condominium associations is far less common and may not be an option for condominiums. Because condominium associations do not own their buildings, they cannot collateralize the real property, and the only collateral for the loan is the standard monthly charges or the board’s bank accounts and reserve funds.
Section 339-jj of the New York Condominium Act permits the board of managers to borrow money, but only to the extent that the condominium’s declaration or by-laws allow for such borrowing. Many governing documents require the approval of unit owners for borrowing above a certain threshold, and acquiring the necessary majority or supermajority of unit owners is no easy feat. Unit owners may be deterred from acquiescing to a board’s loan because there is no available tax deduction for the interest payable on the loan—a cost fully incurred by unit owners.
For new condominiums with some sponsor-controlled units, the condominium association may agree to allocate the funds from the sale of any sponsor-controlled units toward the payment of the upgrades. Alternatively, sponsors possessing any unsold units may qualify for Property Assessed Clean Energy (PACE) financing and may shift the payment structure to the property tax bill. The PACE financing program assists building owners with long-term, fixed-interest rate financing (currently around 5-6%) for capital improvements that reduce utility costs, energy consumption, and greenhouse gas emissions. While residents will still pick up the cost through their common charges, it will be less burdensome given that PACE financing involves low-interest rates over a long period of time. Co-ops are also eligible to receive PACE funding.
The New York City Energy Efficiency Corporation (NYCEEC) also offers the Multifamily Express Green (MEG) loan,
specifically for condominiums and cooperatives implementing energy upgrades. MEG loans start at a minimum of $200,000 and can finance up to 90% of the project costs. Interest rates are set at 7%, and the term is the length of the construction period plus a 10-year amortization period.
Yet, despite the availability of favorable loans for condominiums and cooperatives, there are still obstacles that must be overcome. For condominiums or cooperatives with existing loans, the terms of those loans may outright prohibit additional or secondary debt. Secondary debt may be permissible, but only through the same lender. Careful review of loans and underlying governing documents is critical to successfully planning and implementing Local Law 97 projects.
In October 2023, the NYC Department of Buildings (DOB) clarified the meaning of “Good Faith Efforts,” as it is used in Local Law 97 to mitigate penalties. While not a financing solution, this clarification offers an avenue for cooperatives and condominiums to decrease their expected penalties by showing demonstrated efforts to comply with the law. To demonstrate “Good Faith Efforts,” building owners can submit the annual building emissions report as required by the Law, show compliance with Local Law 84 (energy usage benchmarking), and show compliance with Local Law 88 (lighting upgrades and sub-meter installation).
Additionally, owners can demonstrate any of the following: (a) that the work necessary to achieve compliance is currently underway by having a fully approved application and permit issued for such work; (b) that electrification readiness work is underway (i.e., use of energy-efficient electric-based heating, cooling and hot water systems); (c) that the building was previously under the emissions limit for the previous year; or (d) provide a decarbonization plan by May 1, 2025, that will bring the building into compliance with its 2024 limits no later than 2026 and with its 2030 limits no later than 2040.
Looking ahead, there may still be some hope for condos and co-ops. In 2023, Councilmembers Linda Lee (D-Queens) and Vickie Paladino (R-Queens) introduced legislation to mitigate the effects of Local Law 97. Under Paladino’s proposed legislation, all penalties and requirements would be delayed by seven years so enforcement would not go into effect until 2031. Lee’s bill proposed that penalties for cooperatives and condominiums with an assessed value under $65,000 be lowered in gradual increments if those buildings made prior retrofits that lowered their emissions.
It is also important to note that as Local Law 97 is currently enacted, green spaces are not used to offset a building’s emissions. Lee’s bill also proposes including green spaces in building emission calculations, resulting in decreased penalties for owners. Neither piece of legislation has been enacted at this point.
NY CRE Lenders Need Clarity On Foreclosure Standing
In the current climate in the commercial real estate world, one frequently hears about owners and borrowers, faced with distress, handing back the keys to the lender or loan servicer.
Undoubtedly, there are situations where this may be the best strategy available to the borrower. For instance, in some circumstances, the lender will agree to take back the property in exchange for releasing personal guaranties of the principals of the owner, which may be a wise decision in some circumstances.
One size, however, does not fit all. With some degree of frequency, commercial borrowers, faced with a loan default or other distress related to their property for which they cannot devise an out-of-court resolution — e.g., refinancing the loan, selling the property, etc. — will rely upon the litigation process to try to retain the property or otherwise extract better settlement terms from a foreclosing lender.
The litigation process, of course, could be lengthy and cause all sides in the end to come to a resolution that does not involve handing back the keys.
As seen in Law360
By Christopher A. Gorman and John Muldoon
January 17, 2024
The standing of a foreclosing lender is an issue that has garnered much attention in the 16 years since the 2008 financial crisis. That attention, however, was largely focused on the residential mortgage foreclosure context, with few considering how potential standing issues could arise in the context of commercial mortgage foreclosure actions.
While a standing defense is often not as readily available in the commercial context, there are certainly situations where such a defense may be available to a commercial borrower.
This is particularly so when dealing with commercial loans that, following origination, have been pooled and securitized into a trust with other commercial loans.
Commercial mortgage-backed securities are backed by underlying collateral consisting of commercial mortgage loans on many of the very properties that are quintessentially New York, including, among others, retail properties, office properties, industrial properties, multifamily residential properties and hotels.
By all measures, delinquencies on commercial mortgage-backed securities loans are on the rise nationwide, bringing an expectation of a large number of foreclosure actions that will be commenced in the very near future.
Many of the foreclosing lenders in these cases, i.e., the plaintiff in the foreclosure action, though, will not be the same entity that originated the underlying loan. Commercial mortgage loans, rather than being retained by the original mortgagee, are often pooled and sold into trusts created to receive the stream of interest and principal payments from the mortgage borrowers.[1]
The right to receive trust income is parceled into certificates and sold to investors, called certificate holders. The trustee hires a mortgage servicer to administer the mortgages by enforcing the mortgage terms and administering the payments.
The terms of the securitization trusts into which the commercial mortgages are pooled, as well as the rights, duties and obligations of the trustee, seller and servicer, among others, are set forth in a pooling and servicing agreement, or PSA.
In commercial mortgage foreclosure actions initiated by lenders and trusts based upon securitized debt obligations, borrowers often challenge or call into question whether the proceeding has been properly commenced due to the plaintiff’s lack of standing and, in many cases, the ambiguity regarding who, or what entity, actually owns the mortgage or debt.
The Supreme Court of the State of New York, Appellate Division, Second Judicial Department’s decision in HSBC Bank USA NA v. Sene[2] in September last year may help shed some light on what has otherwise been choppy waters for litigants navigating standing issues in the commercial mortgage foreclosure context.
Sene involved a foreclosure action where the defendant borrower challenged, among other things, the foreclosing lender’s standing, as the lender had allegedly been assigned the underlying loan documents as part of a PSA prior to the commencement of the action.
On its motion for summary judgment, the plaintiff failed to submit the mortgage loan schedule to the PSA, which would have shown whether the note was assigned to the subject trust as part of a securitization transaction.
Accordingly, the Second Department held that the plaintiff failed to demonstrate that, as trustee under the PSA, it had standing as an assignee of the note under the PSA.
In its holding, the Second Department in Sene cited Deutsche Bank National Trust Co. v. Crosby, a case it decided a year prior to Sene.
Crosby similarly held that where a plaintiff fails to submit the mortgage loan schedule to a PSA, which would have shown whether the note was assigned to the subject trust as part of a securitization transaction, a plaintiff fails to demonstrate that, as trustee under the PSA, it has standing as an assignee of the promissory note under the PSA.[3]
What these recent Second Department decisions in Sene and Crosby suggest is that a defendant-borrower has the ability to challenge whether an underlying loan was actually assigned to the plaintiff in the relevant PSA and that, once a defendant borrower raises an issue with respect to the plaintiff’s standing, it is incumbent upon the plaintiff to produce the
underlying PSA to establish its standing.
In other words, where the borrower in a commercial mortgage foreclosure case challenges the plaintiff’s standing, it is incumbent upon the plaintiff, in satisfying its burden of proving its standing, to come forward with the relevant documentation from the securitization transaction, i.e, the PSA and any supporting documents, to show that the underlying securitization documents establish the plaintiff’s authority to foreclose.
Sene and Crosby, however, would seem difficult to square with other Appellate Division authority conversely holding that a borrower cannot challenge whether a plaintiff complied with the terms of the PSA itself.
Indeed, there is contrary authority predating Sene and Crosby stating that a borrower whose loan is owned by a trust does not have standing to challenge the plaintiff’s possession or status as assignee of the note and mortgage based on purported noncompliance with certain provisions of the PSA. [4]
So, for instance, in Bank of America NA v. Patino, where the PSA at issue required the borrower’s loan to be delivered to the foreclosing plaintiff by 2007, but the plaintiff admitted that it did not receive the note until 2014, the Second Department held that the defendant borrower did not have standing to raise this argument at all.
Cases like Patino emanate from the long-standing New York law that the terms of a contract may be enforced only by contracting parties or intended third-party beneficiaries of the contract, and that a nonparty to the contract, such as a borrower in the case of a PSA, does not have the ability to raise issues of noncompliance between the contracting parties.[5]
These cases posit that the borrower does not have standing to challenge noncompliance with the PSA, or any other assignment agreement itself, because the borrower is not a party to the PSA and the assignment of the underlying loan does not affect the borrower’s underlying debt obligations or the terms of the mortgage.
It would seem difficult, if not impossible, to synthesize these two competing lines of case law.
Attempting to read these two lines of cases together, when a challenge to a plaintiff’s standing is raised, the Appellate Division requires the plaintiff to show compliance with the PSA, as seen in Sene and Crosby, while simultaneously not allowing a borrower to raise many issues emanating from the PSA itself as a defense, as seen in Patino, as well as other Second Department cases like Wells Fargo Bank NA v. Tricario in 2020 and Rajamin v. Deutsche Bank National Trust Co. in 2014.
Thus, and again reading these two lines of cases together,
even if a borrower cannot raise noncompliance with the terms of a PSA as a defense, the law allows for the equivalent because a borrower can point out the deficiencies in a plaintiff’s proof precluding the plaintiff from meeting its burden on the issue of standing.
These diametrically opposed positions obviously create confusion for borrowers and litigants alike, and in anticipation of what will likely be an onslaught of commercial mortgage-backed securities foreclosures in the near future, clarity from the Appellate Division will become all the more necessary.
Indeed, based upon a review of the dockets for mortgage foreclosure cases currently pending before New York state court, it does not appear that many borrowers, if any, are raising these issues or making these arguments in their briefs yet.
These arguments, however, certainly will be forthcoming from borrowers in the months ahead based upon the current distress in the real estate markets and recent precedent from the Appellate Division, such as in cases like Sene.
The anticipation of more and more borrowers raising these issues, and lenders forced to confront the issues raised by the borrowers, of course, provides all the more reason why clarity in the near term from the Appellate Division on these issues is critical to lenders and borrowers alike.
Rosenberg & Estis Named Among New York City’s Best Places To Work For A Second Year
Employees vote city’s largest real estate-only law firm onto prestigious list for a second time
Featuring
Rosenberg & Estis, P.C. September 18, 2024
Rosenberg & Estis, P.C., celebrating 50 years as New York City’s largest real estate-only law firm, has once again been named one of Crain’s NY Best Places to Work.
Founded in 1975 by Gary M. Rosenberg and the late Warren A. Estis, the firm has 182 employees with an average employment length of 11.50 years. Crain’s partnered with Workforce Research Group to survey employees about their employers and Rosenberg & Estis was ranked among large companies with 100 or more staff.
Michael E. Lefkowitz, Managing Member and a co-leader of the firm’s Transactional Department, said, “We are deeply committed to fostering a close-knit, supportive environment that values the unique skills, talents, and diverse backgrounds of our team. It is an honor to be recognized and to have our employees show their appreciation for our company culture, helping us achieve this meaningful achievement for the second year in a row.”
The recognition has particular significance this year as Rosenberg & Estis celebrates its 50th anniversary serving commercial real estate clients in New York City and beyond. It has grown from a two-person team to employ many of the city’s most accomplished attorneys and support staff operating in every sector of the industry and acting as advisors to leading owners, lenders, investors and commercial tenants.
As its ranks have grown, the company has been at the forefront of driving positive change in the workplace. Senior legal management includes gender, ethnic and LGBTQ+ diversity, while women, persons of color (POC) and members of the LGBTQ+ community are represented in management in a number of critical areas. The firm continues to build authentic DEI practices that can bolster recruiting efforts, elevate its presence within more diverse communities and contribute to a focus on the overall employee experience.
“During the past 50 years, Rosenberg & Estis has been at the forefront of many of the most significant issues faced by the commercial real estate industry,” said Rosenberg. “We believe much of our success can be attributed to our commitment to maintaining an inclusive and diverse firm-wide culture that fosters a positive working environment as we strategically advance our growth.”
Crain’s partnered with Workforce Research Group to conduct anonymous surveys of thousands of employees at New York City-based companies to select the best places to work. The awards program is designed to identify, recognize and honor the 100 best to work for in the metropolitan area. Highlighting strengths, weaknesses and opportunities to improve, the two-part survey looks to employees for evaluation of their employer’s workplace policies, practices and demographics, as well as its culture and work-life balance.
The Crain’s 2024 Best Places to Work in New York City recognition follows Rosenberg & Estis’ inclusion on the 2024 US News and World Report, Best Companies to work for: Law Firms, the Crain’s 2023 Best Places to Work in New York City list as well as its consistent ranking among The Real Deal’s Top New York Law Firms. In 2020 and 2018, R&E also received the highest honor from The New York Law Journal: Litigation Department of the Year (Real Estate).
Rosenberg & Estis, P.C. Secures Rezoning On Behalf of Agudist Council of Greater New York
City Council approves plan that will facilitate upgrades for synagogue and senior center, as well as 42 apartments in Kensington, Brooklyn.
Featuring David J. Rosenberg
June 6, 2024
Rosenberg & Estis P.C., currently celebrating its 50th year as one of New York City’s pre-eminent real estate law firms, announced that it has successfully secured a rezoning on behalf of Agudist Council of Greater New York, a decades-old Brooklyn congregation.
The rezoning will the facilitate the rehabilitation of the existing synagogue and senior center, as well as the construction of 42 apartments at 817 Avenue H in Kensington, Brooklyn.
David J. Rosenberg, Counsel, represented Agudist Council of Greater New York in the application to rezone the site, which it has owned and operated since 1975. “This rezoning is a model of how houses of worship and nonprofits can collaborate with communities and harness existing assets to address the City’s housing shortage,” said Rosenberg.
The rezoning was one of three recently approved by the City Council that could create more than 300 apartments in Brooklyn altogether as New York continues to grapple with a growing housing shortage. The city is currently advancing its City of Yes for Housing Opportunity proposal that seeks to tackle the housing crisis with various zoning changes that would make it possible to build a little bit more housing in every neighborhood.
“We are pleased to have secured another successful outcome that benefits both our client and the city as it continues to advocate for more robust housing development,” said Rosenberg. “This development will create an important revenue stream that ensures the long-term future of the synagogue, senior center and other important work of the organization, while also creating much needed, family-sized housing units.”
R&E’s award-winning land use and zoning attorneys are renowned for their work obtaining approvals for rezonings,
special permits and variances from the Department of City Planning, Board of Standards and Appeals and Landmarks Preservation Commission. Rosenberg has extensive government relations experience and regularly works with community planning boards and elected officials to expeditiously guide clients through public review processes to secure project approval.
Rosenberg &Estis, P.C. Promotes Two Attorneys
Litigators lauded for contributions to overall excellence of leading law firm
Featuring Jeanine Floyd and Stephen A. Millington
June 1, 2024
Rosenberg & Estis, P.C., currently celebrating its 50th year as one of New York City’s pre-eminent real estate law firms, has announced the promotion of two attorneys. Jeanine Floyd has been elevated from Counsel to Member, and Stephen Millington has been promoted from Associate to Counsel.
“We are incredibly fortunate to have a team of exceptional attorneys providing superior real estate law services to clients navigating an increasingly complex environment,” said Rosenberg & Estis Managing Member Michael Lefkowitz.
“The skill and expertise of these two attorneys is a tremendous benefit to our clients, and we congratulate them on their new positions.”
Jeanine Floyd has risen through the ranks at Rosenberg & Estis, P.C., since first joining the firm as an attorney in 2007. For over a decade, she has provided daily guidance to managers and landlords of commercial and residential properties. Floyd represents landlords, owners, management companies, lenders and condominium boards with respect to legal matters pertaining to landlord-tenant law, general litigation, mortgage foreclosure and condominium lien foreclosure actions.
Floyd graduated from Yale University in 2004 with a B.A. in History and received her J.D. from Fordham Law School.
Since joining Rosenberg & Estis, P.C., in 2020, Stephen Millington has emerged as one of the most accomplished young attorneys at the firm. He has achieved notable success while taking the lead on a series of high-profile real estate transactions, including multiple retail transactions and rollouts for major brands in malls, lifestyle centers, and stand-alone stores. Representing landlords and tenants alike, he advises on all aspects of transactions involving office, retail, industrial and ground leases of Class A properties.
Stephen received a B.A. in Government from Dartmouth College in 2011 and his J.D. from New York University School of Law in 2014. Before joining Rosenberg & Estis, P.C., Stephen was an Associate with Winston & Strawn, LLP.
Rosenberg & Estis, P.C., a premier New York City real estate law firm, obtained a victory at the Supreme Court, Kings County involving a long-term ground lease of a building located at 170 Tillary Street in Brooklyn, by crucially maintaining a second Yellowstone injunction for the ground lessee in a dispute between the ground lessee and its landlord.
Norman Flitt, a member of Rosenberg & Estis, and Laura A. Raheb, an associate with the firm, represented the ground lessee.
R&E prevailed on all points on a motion brought by the landlord to reargue a decision entered by the Hon. Leon Ruchselsman of Supreme Court. In that decision, Judge Ruchselsman granted a Yellowstone injunction with respect to a certain 15-day notice (the “15 Day Notice”) served upon the ground lessee. Rosenberg & Estis successfully argued that the 15 Day Notice, although labeled as a “rent demand” was in fact a notice to cure because the items of “additional rent” at issue involved the ground lessee’s direct payment of real estate taxes and water charges to the City. Specifically, Rosenberg & Estis argued that there is a difference between a ground lessee’s obligation to pay base rent and other charges to a landlord directly, and a ground lessee’s further obligation to pay real estate taxes or water charges relating to a premises directly to a city agency. The payments could not, therefore, properly be categorized as “rent” for a “rent demand” served before commencing a non-payment proceeding in landlord-tenant court. The Court agreed with R&E’s argument that the substance of the obligation must override its labeling or classification.
In denying the landlord’s motion to reargue Judge Ruchselsman’s decision, which granted ground lessee its second Yellowstone injunction related to the ground lease, the Court held that the 15 Day Notice “regardless of how it is classified or labeled, is not a mere rent demand” and thus it “may be
the subject of a Yellowstone injunction.” The Court went on to say that “there would be no basis to conduct a non-payment proceeding at all” and that the 15 Day Notice “could only be challenged by seeking a Yellowstone regardless of the notice’s purported representations as nothing more than a rent demand.”
As Norman Flitt of Rosenberg & Estis stated: “It is gratifying that the Court analyzed the substance of the obligation rather than relying merely on the labeling of the obligation to arrive at a just and equitable result.”
Rosenberg & Estis, P.C. Assists
The Durst Organization in Bringing Dr. Phil’s Network to NY Market
New channel utilizes WMBC/TEMPOTEK’S broadcast facilities atop One World Trade Center
Featuring Jean S. Tom
May 21, 2024
Rosenberg & Estis, P.C., currently celebrating its 50th year as one of New York City’s pre-eminent real estate law firms, announced that the firm assisted The Durst Organization in facilitating the entry of Dr. Phil McGraw’s new media programming to the New York broadcast market.
The celebrity talk show psychologist launched his own platform, Merit Street Media, last month. The 24/7 channel broadcasts a morning news show, primetime lineup anchored by legal commentator Nancy Grace, and McGraw’s own new show, Dr. Phil Primetime, to some 80 million viewers across the US. To reach the 18 million viewers in the New York metropolitan area, it required a centrally located transmitter.
WMBC-TV/TEMPOTEK is an independent, full-power, commercial television station licensed to Newton, NJ, and serves the New York metro area. Its programming is available overthe-air, on cable TV, Fios and Direct TV and Dish Network throughout the New Jersey - New York metropolitan area. As of April 2, 2024, it began broadcasting Dr. Phil’s Merit Street Media network’s programming to New Yorkers, utilizing its facilities from atop One World Trade Center in New York.
Built by The Port Authority of New York and New Jersey and The Durst Organization in a unique public-private partnership, One World Trade Center offers advanced communications and technology infrastructure and unobstructed 360-degree signals to serve the tri-state region. The building’s stateof-the-art master antenna system emits approximately 2.2 megawatts of effective radiated power and serves multiple broadcasters, including CBS, NBC, PBS, FOX and ION Media.
Last year, The Durst Organization launched NEXTGEN TV, also known as ATSC 3.0, at One World Trade Center, making the building the first and only broadcasting facility in New York to offer the elevated over-the-air broadcasting service.
Jean S. Tom, Counsel at Rosenberg & Estis, represented The Durst Organization in the transaction. Robert Becker and Marc Musgrove handled the negotiations in-house for The Durst Organization.
To date, the Rosenberg & Estis telecommunications subspecialty team consisting of Ms. Tom and others has worked on more than 40 television and radio broadcast license agreements for The Durst Organization’s One World Trade Center and One Five One West 42nd Street towers. Rosenberg & Estis negotiates agreements on behalf of building owners with telecommunications providers for various telecommunications uses, including cell phones, television signals and fiber optic networks to provide service to tenants in buildings or to the general public.
Said Ms. Tom, “Rosenberg & Estis regularly represents New York landlords with negotiating highly intricate and nuanced agreements within the specialized telecommunications industry. It is always a pleasure to assist The Durst Organization as it works with its tenants and licensees to help them achieve success.”
Rosenberg & Estis, P.C. Secures Important Victory Against Icon Parking
Ruling Allows Discovery to Proceed in Action Seeking to Pierce the Corporate Veil and Hold Icon Parking Holdings Responsible for its Subsidiary’s Non-Payment of Rent
Featuring Bradley S. Silverbush and Jake W. Bedor
February 20, 2024
Rosenberg & Estis, P.C. has secured a significant victory in the Appellate Division, First Department, of the New York State Supreme Court. The First Department upheld the trial court’s decision and order denying New York parking giant Icon Parking Holdings, LLC’s motion to dismiss the firm’s veil-piercing claims in a dispute over nonpayment of $1.3 million in rent by Icon’s subsidiary.
The dispute focuses on the non-payment of rent by a single-purpose-entity subsidiary of Icon Parking Holdings who operated a garage at 245 East 19th Street in Manhattan. The suit alleges that the Icon parent company directed its subsidiary to cease paying rent during the COVID pandemic — when evictions were halted — while funneling its parking revenue to the Icon parent. Then, when evictions resumed, the garage owner was left with no way to collect the delinquent rent from the judgment proof single-purpose-entity, while the Icon parent company sought to be shielded from liability.
Rosenberg & Estis Member Bradley Silverbush and Counsel Jake Bedor represent garage owner 245 East 19 Realty LLC in the action, which sought to pierce the single-purpose-entity’s corporate veil and seek damages directly from the Icon parent company. Icon is represented by Pillsbury Winthrop Shaw Pittman LLP. The First Department’s decision to uphold the trial court’s denial of Icon’s motion to dismiss the veil piercing claims now enables the garage owner to proceed with discovery. Rosenberg & Estis is confident that documents and testimony adduced during discovery will prove the Complaint’s allegations.
The case is one of several actions against Icon, whose parking operator affiliates stopped paying rent to property owners under then Gov. Andrew Cuomo’s eviction moratorium, willfully and knowingly diverting payments to an Icon controlled master account, not paying any of it as rent, even if there was enough to do so.
Silverbush added, “The breadth of the scheme was massive when you understand that there were approximately 20% of the 250 Icon-branded garages, at the time, sued for various defaults in their lease obligations. We intend to follow the money and get it back to those who are rightfully entitled to receive it.”
Judges Troy K. Weber, Lizbeth Gonzalez, Martin Shulman and Bahaati E. Pitt-Burke upheld the Supreme Court’s denial of Icon’s motion to dismiss veil piercing claims, noting the Complaint sufficiently alleged that, even if Icon had operated a central banking system to collect takings before the pandemic, the company “took advantage of it to perpetuate a fraud… by transferring all of Tenant’s revenue to itself each day.”
“This was a bald-faced attempt to exploit the pandemic by taking parking fees collected from their customers that should have gone towards the garage rent obligations and wrongfully sending that money up to the parent company without paying rent,” said Silverbush. “This decision allows us to depose the individuals whom we believe benefited from Icon’s scheme by pocketing millions of dollars that were rightfully due to the landlord.”
Silverbush said the decision paves the way to determine exactly how much Icon diverted. He added, “We are pleased to have defended a favorable decision we obtained from the Supreme Court and will continue to fight to ensure our clients’ rights.”
Recent Events at Rosenberg & Estis
BISNOW NEW YORK AFFORDABLE HOUSING EVENT
Daniel M. Bernstein, 8.8.24
R&E Member Daniel M. Bernstein moderated a panel discussion at the Bisnow NY Affordable Housing Event. Daniel directed the Bisnow discussion of the critical 485-x tax exemption, the 421-a (16) tax exemption and City of Yes proposed zoning amendments. Please contact Daniel for more information about 421-a (16), 485-x, the commercial conversion tax incentive 467-m or any NYC development issues.
SUMMER LAW CLERK PROGRAM FAREWELL
Rosenberg & Estis, P.C., 8.7.24
We raised a glass to celebrate the efforts and hard work of our 2024 Summer Law Clerks. As this year’s program comes to an end, we say farewell (for now) but look forward to seeing all they accomplish in the future!
LITIGATION DEPARTMENT GROUP LUNCH
Rosenberg & Estis, P.C., 8.1.24
R&E’s Litigation Group gathered together on the terrace for its annual summer lunch. It was a tremendous success, nobody left hungry!
TRAN-AXE-TION NIGHT OUT: LIVE AXE THROWING!
Rosenberg & Estis, P.C., 7.31.24
The Transactions Department took to “Live Axe” in the Lower East Side to unleash their inner lumberjacks for some good ‘ole fashioned axe throwing. This event really hit the bullseye, and thankfully, no attorneys were hit in the process. Laser focused, Stephen Millington drops the axe on his competition, taking his team, the Flaming Axe Throwers, to a 2-0 victory!
733 SUMMER SOCIAL: TENANT APPRECIATION EVENT
Rosenberg & Estis, P.C., 7.31.24
Our staff beat the heat and chilled out at the Summer Social stand provided by Pop Bar. Thank you to the Durst office for organizing this scrumptious mid-day sweet treat.
ASSOCIATE NIGHT OUT (PUPPY SPEAKEASY)!
Rosenberg & Estis, P.C., 7.25.24
What a great way to spend an Associate night out - at the Puppy Speakeasy. Our Associates and Summer Law Clerks enjoyed great conversation, libations, and quality time with some very adorable puppies.
R&E TERRACE GATHERING (FOR ALL)!
Rosenberg & Estis, P.C., 7.23.24
R&E staff was invited to an after-hours gathering on our 12th-floor terrace. Everyone who gathered enjoyed a wide array of summertime delectables. Here’s to coming together, collaborating, and celebrating everyone’s hard work
R&E MEMBER RICHARD L. SUSSMAN MODERATES YJP NY EVENT
Richard L. Sussman, 7.23.24
R&E Member Richard L. Sussman moderated YJP’s networking session “Secrets of Success and the Importance of Philanthropy with John Usdan.” John and Richard spoke at great length about their professional experience, building wealth, and how they achieved even greater success in philanthropy.
R&E’S ANNUAL DINNER AND GOLF OUTING
Rosenberg & Estis, P.C., 7.16.24
R&E hosted its annual Summer Golf Invitational and Dinner at the St. Andrews Golf Club in Westchester. It is always a Summer highlight to tee up with our esteemed colleagues and friends from the Durst Organization. The St. Andrews Golf Course offers players a lush golf course and a first-class golfing experience.
SUMMER LAW CLERKS - GOLF CLUB AT CHELSEA PIERS
Rosenberg & Estis, P.C., 7.11.24
The firm’s Summer Law Clerks took a swing at the Chelsea Golf Club. Everyone brought their best game with them. What a great way to celebrate everyone’s hard work and tee off the week!
VIRTUAL ROUNDTABLE “UNLOCK NYC’S POTENTIAL: CITY OF YES”
David J. Rosenberg, 7.10.24
R&E Counsel David Rosenberg participated in the Virtual Roundtable “Unlock NYC’s Potential: City of Yes” led by Edith Hsu-Chen, Executive Director of Department of City Planning, NYC. It was a great conversation about City of Yes for Housing Opportunity. Watch this not to be missed roundtable discussion here
R&E’S ANNUAL SUMMER ICE CREAM SOCIAL
Rosenberg & Estis, P.C., 7.10.24
R&E’s annual ice cream social does not disappoint. Staff assembled in the firm’s conference room and were treated to a wide assortment of frozen treats. Nothing says Summer like the annual R&E Ice Cream Social.
THURSDAYS ON THIRD - PRIDE EDITION!
Rosenberg & Estis, P.C., 6.27.24
R&E hosted Thursdays on Third “Pride Edition” to celebrate Pride Month. Everyone gathered on the 12th Floor Terrace and were treated to rainbow themed delectables and decor. What a great way to reaffirm everyone’s commitment to embracing diversity!
SUMMER ASSOCIATES EVENT: METS V YANKEES GAME
Rosenberg & Estis, P.C., 6.26.24
Summer Associates escaped the hustle and bustle of lawyering and got to experience a Subway Series baseball game at CitiField. Regardless of rain delays, this crew forged along and enjoyed all that CitiField has to offer. Rain would never dampen the spirts of this bunch! Thank you to all who attended.
2024 NEW YORK COOPERATOR EXPO
Matthew E. Eiben, 6.18.24
R&E Counsel Matthew Eiben attended the NY COOPERATOR EXPO 2024, New York’s Largest Co-op, Condo & Property Management Expo hosted at the New York Hilton Midtown. The event had a fantastic turnout, thank you to everyone who stopped by to say hello or to learn more about the firm and what’s on the horizon with coops and condos.
YMCA 2024 HEROES OF NEW YORK GALA
Rosenberg & Estis, P.C., 6.13.24
R&E was proud to support the YMCA of Greater New York by attending an extraordinary evening in the historic Temple of Dendur at The Metropolitan Museum of Art. This celebration was in honor of the heroes committed to serving NYC, and raise critical funds for the Y Programs that provide services to the communities across all five boroughs of NYC.
SUMMER LAW CLERKS - MY COOKING PARTY
Rosenberg & Estis, P.C., 6.12.24
Thank you to My Cooking Party and to everyone who attended our Summer Law Clerk cooking event! It was so much fun and SO delicious, especially that chocolate cake!
LUNCH AND LEARN: INTERNAL PERSONAL BRANDING
Rosenberg & Estis, P.C., 6.11.24
Rosenberg Estis, P.C. hosted a lunch and learn today on the power of personal branding when it comes to the practice of law. Many thanks to Dave Lorenzo and Nicola Gelormino of Exit Success Lab for such an informative and insightful presentation!
THE MBBA PRESENTS - ELEVATE & EMPOWER: BLACK REAL ESTATE DEVELOPMENT SYMPOSIUM 2024
Rosenberg & Estis, P.C., 6.11.24
R&E welcomed members of the Metropolitan Black Bar Association (MBBA) as host of its inaugural Elevate & Empower: Black Real Estate Development Symposium.
R&E Associate Shakiva Pierre, along with Jerome Frierson, Director of Housing Team for Bronx Defenders, moderated a panel discussion with Leleah James, Vice President Community Engagement, Related Affordable; Josiane Lysius, Associate Broker, Corcoran Group; Kenneth Morrison, Managing Member and Principal, Lemor Development Group; Malcolm Punter, President, Harlem Congregations for Community Improvement, Inc. and; Craig Livingston, Managing Partner, Exact Capital. In further celebration of its 40th year as NY’s largest unified Black Bar Association, MBBA’s roundtable discussion focused on leveraging real estate development to empower the Black community.
Topics included past, present and future development initiatives, perspectives on community engagement and strategies for increasing Black representation in real estate development. Pierre, who serves as MBBA Co-Chair, Real Estate Law Section, said, “Real estate creates jobs, stimulates economic growth and generates wealth. Open forums like the MBBA Symposium provide an ideal platform for sharing information that can increase Black representation in the process and we are thankful to Rosenberg & Estis for their ongoing support.”
The Metropolitan Black Bar Association (MBBA) is a unified, citywide association of Black and other minority lawyers in the New York metropolitan area, with members in all five boroughs.
BOMA NEW YORK SPRING GOLF CLASSIC
Adam R. Sanders and Cori A. Rosen, 6.10.24
R&E Members Adam R. Sanders and Cori Rosen attended the BOMA New York Spring Golf Classic at the Edgewood Country Club. Congratulations to Cori Rosen on winning the closest to the pin contest!!!
NYCLA - 2024 CIVIL COURT PRACTICE SECTION ANNUAL DINNER
Alex M. Estis, 6.6.24
R&E attended the 2024 New York County Lawyers Association, Civil Court Practice Section Annual Dinner. In this photo is R&E Member, Alex Estis along with NY Supreme Court Justices Hon. Arthur Engoron and Hon. Alex Tisch. Thank you to NYCLA for hosting such a phenomenal event.
COPE FOUNDATION - ANNUAL GOLF OUTING
Rosenberg & Estis, P.C., 6.3.24
R&E proudly sponsored COPE Foundation’s 25th Anniversary at this year’s golf outing. We pay tribute to Sammi’s Circle and the work of Larry Mergentime, R&E Member and Co-President of Board of Directors at COPE (Connecting Our Paths Eternally). This was a fantastic event in support of a phenomenal cause. COPE is a nonprofit grief and healing organization helping parents and families living with the loss of a child.
2024 J.P. MORGAN CORPORATE CHALLENGE
Rosenberg & Estis, P.C., 5.30.24
Thank you to all participated at the J.P. Morgan Corporate Challenge. Everyone seemed to have SO much fun during the race and at reception afterwards. Congratulations to Jake Bedor and Hannah Biscardi for being our fastest male and female 2024 runners!!
BROOKLYN LAW SCHOOL “LAST WEDNESDAYS”
Deborah E. Riegel, 5.29.24
R&E Brooklyn Law School Alumni President Deborah E. Riegel hosted a “Last Wednesdays” get together for fellow alumni at R&E’s offices. Everyone seemed to enjoy the warm weather and 12th Floor terrace.
R&E SUMMER LAW CLERK WELCOME LUNCH
Rosenberg & Estis, P.C., 5.29.24
R&E hosted a welcome lunch on the 12th Floor Terrace for its Summer 2024 Interns. What a great way to kickoff the 2024 Summer Season!
2024 MUSLIM BAR OF NEW YORK GALA
Syed Ali Fatmi, 5.28.24
R&E Associate Syed “Ali” Fatmi attended the 2024 Muslim Bar of NY Gala. Ali is an active member of the Muslim Bar Association of NY. He is pictured here with Muhammad Faridi who is the recipient of the trail blazer award and the new president of the New York City Bar Association.
AAJANY: ASIAN AMERICAN/PACIFIC ISLANDER MONTH CELEBRATION
Rosenberg & Estis, P.C., 5.7.24
We had such a great time at the Asian American Judges Assoc. of NY (AAJANY) — Asian American/Pacific Islander Month Celebration! The night was even more special being able to share it with our friends from The Durst Organization. Pictured above (L-R) Daniel Grobman, Durst; Jean Tom, R&E; Jolie Meer, R&E; Bill Byers, R&E and Michael Rhee, Durst.
ADMINISTRATIVE PROFESSIONALS
DAY: STAFF APPRECIATION LUNCH
Rosenberg & Estis, P.C., 4.24.24
R&E leadership and attorneys were honored to celebrate the firm’s talented, hardworking and diverse staff at this year’s Administrative Professionals Day. The firm thanks you for your ongoing commitment to R&E’s mission: serving the New York City real estate community. R&E’s accomplishments within the legal industry are only made possible by the work of our dedicated administrative professionals.
R&E ATTORNEY NIGHT OUT! BOWLERO TIMES SQUARE
Rosenberg & Estis, P.C., 4.18.24
R&E Associate Shakiva Pierre, R&E Member Richard Y. Im and R&E Associate Layla C. Noriega (pictured L-R) enjoy another All-Attorney Night Out, this time at Bowlero in Times Square. Thanks to all who were able to participate in the fun!
JEWISH LAW STUDENTS ASSOCIATION ALUMNI DINNER
Deborah E. Riegel, 4.18.24
The Jewish Law Students Association (JLSA) recently held their Alumni Dinner. Congrats to alumni honorees: R&E member, Deborah Riegel ’93 and Debbie Epstein Henry ’94. They were recognized for their dedication and commitment to Brooklyn Law School’s Jewish community throughout this year.
DIVERSITY, EQUITY & INCLUSION TRAINING - ALLYSHIP
Rosenberg & Estis, P.C., 4.11.24
Diversity is the fabric that makes our community vibrant and unique. Rosenberg & Estis, P.C. celebrated Diversity Month this year by renewing its commitment to promoting diversity and inclusion in the workplace. The firm hosted another dynamic employee workshop on “Fostering Active Allyship in the Workplace.”
TERRACE REOPENING! THURSDAYS ON THIRD (FOR ALL!)
Rosenberg & Estis, P.C., 4.9.24
What a great way to kick off the warm weather season! It’s no secret that one of R&E’s favorite times of the year is the Annual Reopening of the Terrace. Thanks to all who were able to attend this fantastic Thursdays on Third. We look forward to many more this summer!
BROOKLYN LAW SCHOOL REAL ESTATE SOCIETY ALUMNI DINNER
Rosenberg & Estis, P.C., 4.9.24
With R&E’s very own Deborah E. Riegel serving as President of Brooklyn Law School’s Alumni Board of Directors, the firm proudly continued its support of BLS at this year’s Real Estate Society Alumni Dinner. Thanks to all R&E attorneys (and BLS alumni) who were able to attend, including Debby, Cori A. Rosen, Alex M. Estis and Layla C. Noriega - pictured here.
THE 2024 ECLIPSE EXPERIENCE FROM R&E’S TERRACE
Rosenberg & Estis, P.C., 4.8.24
R&E’s terrace has always been the ultimate destination for a variety of fun events, including lunches, ice cream outings, game nights, movie nights and - of course - Thursdays on Third. We broke the mold this year, however, with an absolutely stunning view of the 2024 Eclipse!
ROSENBERG & ESTIS, P.C. ANNUAL SPRING BREAKFAST
Rosenberg & Estis, P.C., 4.3.24
Thanks to everyone who helped prepare such a wonderful spread for this year’s Annual Spring Breakfast. We love the culture at this firm and especially any opportunity for attorneys and staff alike to socialize together during a workday!
BROOKLYN LAW SCHOOL ALUMNI DINNER, DEBORAH RIEGEL HONORED
Deborah E. Riegel, 03.20.24
At this year’s BLS Alumni Dinner, R&E’s very own Deborah Riegel was honored for her outstanding work and dedication as the President of the Brooklyn Law School Alumni Association Board. President and Joseph Crea Dean David Meyer presented Deborah with an award for her service.
THE TORCH FOUNDATION’S (34TH ANNUAL) MONTE CARLO NIGHT
Rosenberg & Estis, P.C., 03.16.24
Rosenberg & Estis, P.C. was proud to attend and sponsor The Torch Foundation’s 34th Annual Monte Carlo Night at Chelsea Piers. Congratulations to the 2024 Honorees: Michael Aisner, Kevin Hoey, and Avi Itzkowitz. R&E was the DJ & AV Sponsor for the event. R&E’s very own Alex M. Estis, Member, and CFO Michal Rutigliano ante up for a picture (LR) while at Monte Carlo Night.
GETTING A FOOT IN REAL ESTATE: ST. JOHN’S LAW VIRTUAL PANEL
Ashley Williams and Meghan Paola, 02.28.24
R&E Associates Ashley Williams and Meghan Paola together with the Mattone Family Institute for Real Estate Law, the St. John’s Law Alumni Association First 10 Chapter and Alumnae Leadership Council Chapter presented: “Getting a Foot in Real Estate: First 10 Alumnae in Real Estate Law,” discussing their career paths and to sharing pointers for entering the field.
NEW YORK CONSTRUCTION & DEVELOPMENT CONFERENCE
Spencer Romoff, 02.22.24
R&E Member Spencer Romoff moderated the “Alternative Building Methods: Green Construction & Creative Design Methods” panel at Bisnow’s New York Construction & Development Conference. The panel discussion focused on sustainable development strategies in urban environments like New York City, examining crucial elements such as geothermal energy and modular construction.
METROPOLITAN BLACK BAR ASSOCIATION WEBINAR
Shakiva S. Pierre, 02.20.24
R&E Associate and Co-Chair of the Real Estate Law Section for the Metropolitan Black Bar Association, Shakiva Pierre, moderated a discussion on closing the racial wealth gap. This event was webinar-style discussion on the racial wealth gap with regard to the power of black institutions such as historically, black colleges and universities and churches, to increase black wealth in America.
ROSENBERG & ESTIS’ ALL ATTORNEY EVENT
Rosenberg & Estis, P.C., 02.08.24
Rosenberg & Estis hosted an all-attorney event at SPIN New York Midtown. It was a such a congenial night out and a special opportunity for our Litigation, Transactions and Administrative Law attorneys to socialize with one another. There were many friendly, yet competitive games of ping pong. It was a great night out - thanks to all who could participate in the fun!
R&E ATTORNEY WOMEN’S GROUP LUNCH
Rosenberg & Estis, P.C., 1.25.24
R&E’s inaugural attorney women’s group lunch on January 25, 2024 was a huge success. Thank you to all who attended for your active and enthusiastic participation.
YOUNG JEWISH PROFESSIONALS ROUNDTABLE
Zachary J. Rothken, 01.10.24
Zachary J. Rothken, Member and Head of the firm’s Administrative Law Department, moderated a roundtable discussion for YJP – Young Jewish Professionals, “Investment, Development & Management in Real Estate,” with speaker John Usdan, CEO of Midwood (Young Leadership) at Midwood Investment & Development in NYC.
