Courts Differ on Rights Of Tenants in Illegal Lofts

The court acknowledged that courts in the First Department “have repeatedly held that rent stabilization under ETPA may apply where the unit is capable of legalization and the owner knew of or acquiesced in a tenant’s conversion to residential use.” It specifically cited two Appellate Division, First Department decisions, Duane Thomas LLC v. Wallin⁶ and 142 Fulton LLC v. Hegarty⁷ as having enunciated that position.⁸

In Duane Thomas, the First Department affirmed the trial court’s denial of a motion and cross-motion for summary judgment in a declaratory judgment by a landlord seeking a declaration that tenants who had commenced occupancy of a loft dwelling after the Loft Law window period had closed without the subject unit having been registered with the Loft Board were not rent stabilized tenants. The court stated that it “appears that the unit is capable of being legalized, and may therefore be subject to rent stabilization.” As indicia that the unit might be capable of being legalized, the court pointed to the fact that the applicable zoning resolution permitted residential use for loft dwellings and the fact that a temporary residential certificate of occupancy covering the unit had been obtained by the landlord years before. In 142 Fulton, the First Department, citing Duane Thomas, similarly stated that “[the trial] court properly found that the lofts may possibly be legalized and accordingly that they may be subject to rent stabilization.”

In Caldwell, the Second Department stated that it had twice addressed – in the cases of Gloveman Realty Corp. v. Jefferys⁹ and in 315 Berry Street Corp. v. Hanson Fine Arts¹⁰ - the issue of whether the rejection by the Court of Appeals in Wolinsky of ETPA protection for illegal conversions is absolute. It described the holding in Gloveman, a 2005 decision, as follows:

In its 2007 decision in 315 Berry Street, the Second Department held that ETPA protection was applicable to a unit illegally converted from commercial to residential use where it was “undisputed that the [owner] . . . knew of and acquiesced in the unlawful conversion, . . . that the applicable zoning generally permits residential use, and that the [owner] sought legal authorization to convert the premises to such [residential] use during the pendency of this proceeding.”

In Caldwell, the Second Department distinguished 315 Berry Street from Gloveman on the grounds that in the former case, unlike the latter, the owner had taken affirmative steps during the pendency of the proceeding to lawfully convert the premises to residential use. The Caldwell court described Gloveman as a situation where both the tenants and the owner, “while aware that a claim of ETPA protection had been asserted [by the tenants], pursued a course leading to that end,” and the Appellate Division “simply endorsed the status that each of the parties had sought.”

The Caldwell court characterized the exception recognized in 315 Berry Street to the Wolinsky rule that illegal conversions do not fall within the ambit of the ETPA as being “an extremely limited one, applying only to the particular circumstances described there in [315 Berry].” It continued: