Scott E. Mollen
Scott E. Mollen ()

Landlord-Tenant—Court Dismisses Holdover Proceeding Based on Illegal Business or Trade Being Conducted out of Apartment—Landlord Failed to Demonstrate There Was Ongoing Business of Manufacturing or Selling Drugs at Premises—Failed to Show Tenant’s Knowledge or Acquiescence In Illegal Use of Apartment

A landlord commenced a holdover proceeding, seeking to terminate the tenancy of a tenant “based upon an illegal business or trade being conducted out of her apartment pursuant to RPAPL 711(5), RPL 231(1) and Rent Stabilization Code [RSC] Sections 2524.2(b) and (c) and 2524.3(d).” The landlord alleged that a subtenant, in the vicinity of the apartment, “was in possession of a controlled substance, oxycodone, and sold two of the pills to an undercover detective.” The landlord further alleged that the subtenant and the tenant’s daughter had acted in concert to sell one pill and that another subtenant “possessed and sold marijuana to an undercover officer inside the building.” The foregoing incidents occurred on Oct. 18, 2012. The landlord also alleged that it had received numerous complaints from tenants in the building regarding drug related activities from the apartment.

The tenant moved to dismiss, arguing that there was “no allegation that the apartment itself was used for illegal purposes.” The tenant asserted that “even if an illegal purpose can be inferred from the pleadings the one incident that occurred on October 18, 2012 [was] insufficient to state a cause of action pursuant to RPAPL 711(5).” The tenant argued that “[o]ne arrest, on one day, without more, fails to state a claim establishing that the apartment is habitually being used for an illegal purpose.”

The landlord was required to allege that the apartment had been “used for an illegal business or trade, and that the tenant knew or acquiesced in the illegal use of the apartment.” There was no statement in the notice of termination (notice), or the supporting documents regarding the tenant’s “knowledge or acquiescence of the illegal use of her apartment.” A criminal complaint attached to the notice stated that “nine pills were found in plain view on top of a dresser.” The court found that, “[w]ithout more, this can not rise to the level of acquiescence to an illegal business.” A police officer stated that he had “found crack-cocaine in a dresser drawer in a large sandwich bag, as well as underneath a candle.” The court noted that “the illegal drugs found in the apartment” had not been “in plain view,” had not been found pursuant to a search warrant and had not been offered for sale by the subtenants to the police informant.

The court observed that “[a]ll the usual indicia of an illegal business or trade are absent in this petition.” The “recovery of an extraordinary quantity of drugs may result in the inference that the premises are used for an illegal trade, and that the tenant knew of the use.” Here, “[w]ithout any additional indicia of an illegal business, the total amount of drugs recovered does not rise to the level of an illegal business or trade.” Moreover, there was an absence of “associated drug related paraphernalia” such as “scales, safes, large quantities of cash or records,” guns, ammunition, or packaging material.

Thus, the court found that the “[i]ndicia of a drug business, with the apartment as the focal point is entirely missing from these pleadings.” Even “[a]ffording the [landlord] every favorable inference,” the landlord had not shown that there is an “ongoing business of manufacturing or selling drugs at the premises.” Additionally, there was no specific allegation as to the tenant’s knowledge or acquiescence in the illegal use of the apartment. The only statement about the tenant was “speculative.” The criminal complaint had stated that the tenant’s daughter and two subtenants had been acting in concert to sell drugs. The tenant was not alleged to be part of that activity or to have acquiesced in any way. Thus, the court dismissed the proceeding.

Creston 2075 v. Diaz, L&T 19707/13, NYLJ 1202628473583, at *1 (Civ. BX, Decided Nov. 4, 2013), Stanley, J.

Foreclosures—Lender Who Became Owner and Holder of Note and Mortgage Upon Merger With Original Lender, Had Standing and an Assignment Was Not Required—Borrower Failed to Demonstrate that Discovery Would Lead to Relevant Evidence and Facts Essential to Justify Opposition Were Exclusively Within Knowledge and Control of the Lender—Ongoing Discussions About Possible Modification is Not a Defense—Lenders are Not Obligated to Modify Mortgages

The court granted a plaintiff lender’s motion for summary judgment in an action to foreclose a mortgage. The court rejected the borrower’s defense of lack of standing. The defense of lack of standing is not jurisdictional in nature and the borrower had waived such defense by failing to assert such defense in its pre-answer motion to dismiss or answer. Moreover, such defense lacked merit since the plaintiff had become the owner and holder of the note and mortgage upon its merger with the original lender. Thus, “[n]o showing of any assignment of the note and mortgage or other transfer of the note to the plaintiff is required….”

The borrower had also failed to “offer an evidentiary basis to show that discovery may lead to relevant evidence and that the facts essential to justify opposition to the motion were exclusively within the knowledge and control of the plaintiff.” The court noted that “mere hope or speculation that evidence sufficient to defeat a motion for summary judgment” is insufficient.

Additionally, the court rejected the borrower’s defense based on “ongoing discussions… regarding a possible modification of the subject loan.” The court explained that “a mortgagee has no obligation to modify a mortgage loan prior to or after a default….” The court further stated that the borrower could challenge the amount owing at proceedings conducted by a referee who would compute the amounts owing.

The court also rejected the borrower’s defense based on the lender’s “settlement of litigation in other forums and its notification that defendant… is entitled to some form of remuneration under the terms of such settlement….” The borrower had argued that such settlement demonstrated that the lender had engaged “in deceptive acts and improper practices such as the ‘robo-signing’ of litigation documents” and such improper conduct estops the lender from enforcing its contractual remedy of foreclosure and sale in the subject action. The court rejected such defense based on relevancy. The court rejected certain other defenses, granted the lender’s motion for summary judgment and ordered the appointment of a referee to compute.

CitiMortgage v. Vatash, 42886/2010, NYLJ 1202631927454, at *1 (Sup. SUF, Decided Nov. 4, 2013), Whelan, J.

Tax Certiorari—Tax Assessment For Not-For-Profit Country Club Reduced

This case involved an appeal by, inter alia, a County Board of Assessors (county), in consolidated tax certiorari proceedings pursuant to Real Property Tax (RPTL) Law Article 7, to review real property tax assessments for three tax years. The trial court had awarded reductions and directed that tax overpayments be refunded, with interest.

The petitioner, a country club, owns approximately 123 acres of property “on which it operates a private, not-for-profit, golf course [club].” The parties had agreed that, “the property should be assessed as a private, for-profit golf course” and the proper approach for valuation should be the income capitalization method. The parties also agreed that the real estate taxes should be considered when computing the property’s fair market value. They differed on how to do so.

The club’s appraiser, in essence, “converted the leases for his comparable properties into gross leases, under which the owner, rather than the lessee, is obligated to pay the real estate taxes, and utilized the ‘assessor’s formula,’ pursuant to which a factor is added to the capitalization rate to account for real estate taxes.” The appellant county’s appraiser assumed “a triple net lease, under which the lessee, not the owner, is obligated to pay real estate taxes.” Under the county’s approach, “the expense of real estate taxes is accounted for in the fair market rent for the property, and need not be accounted for in the capitalization rate.” The county’s appraiser also “downwardly adjusted his rent-to-revenue ratio, used in determining the fair market rent for the property, to account for high real estate taxes in the subject location.”

The trial court “adopted the approach proposed by the Club, which resulted in a reduction of the original assessed value.” The salient issue on appeal was whether the approach utilized by the club’s appraiser and adopted by the trial court, “was ‘fair and nondiscriminating,’ was ‘acceptable,’ and resulted in a fair market value assessment of the subject property,” or, whether, as the county argued, “it resulted in improper ‘double counting.’”

The club’s appraiser explained:

a key difference between a gross lease and a triple net lease is the manner in which the responsibility to pay real estate taxes is allocated. Under a gross lease, the landlord or owner is responsible for paying the real estate taxes on the property. Under a triple net lease, the tenant assumes the responsibility of paying the real estate taxes. All other things being equal, the rental payment under a triple net lease would be lower than the rental payment under a gross lease, since the tenant under a triple net lease assumes the additional financial burden of paying the real estate taxes on the property…. “[i]f an operator knows he can lease the same golf course and not pay taxes compared to the same golf course that has to pay taxes, he can pay more rent [for] the one with no taxes, so the taxes [are] critical as an operating expense.”

Under a municipal lease, the property is owned by the municipality and neither the tenant nor the municipal owner pays taxes on the tax-exempt property. The county’s appraiser opined that:

Since the determination of an appropriate real estate tax burden is the ultimate objective in this valuation, the most mathematically accurate approach to value begins with an analysis of fair market rent to include the operator’s occupancy costs associated with real estate taxes. Or in other words, the equivalent additional amount of rent that a Lessee would be willing to pay if not responsible for payment of taxes.

The county’s appraiser explained that:

the preferred valuation method assumes a triple net lease. Because the burden of real estate taxes is already accounted for in the decreased rental value under a triple net lease, [The county's appraiser] did not add a tax load factor to the capitalization rate when computing value pursuant to his income capitalization analysis.

The court explained that “‘[a]ny fair and nondiscriminating method’ that will achieve the tax assessment goal of arriving at a fair market value result is acceptable….” The court further noted that a “very similar situation arose in Matter of Mill River Club v. Board of Assessors, 48 AD3d 169. Mill River Club observed that:

The difficulty,…, is that the lease of a tax-exempt property does not fit neatly into either a triple net lease or gross lease category because, where the leased property is tax-exempt, neither the tenant nor the owner pays real estate taxes. Additionally, as the county itself conceded, tax-exempt municipal and state golf courses are not operated with a view toward maximizing profits; rather, they are generally designed to provide affordable play, with fee structures set by the municipality or the State to advance that goal. As a result, tenants of tax-exempt courses generally receive lower golf revenues in exchange for the tax exemption….

The appellants argued that the owner of the municipal golf course “does not pay real estate taxes, as is the case with a triple net lease.” However, the club countered that “neither does the tenant, as is the case with a gross lease, which typically has the effect of increasing the amount in rent the tenant may be expected to pay.”

The Appellate Division, in Mill River stated that it could not find that the trial court had erred in adopting the county’s “triple net lease assumption for tax-exempt comparables,” since “‘the rental income actually received by a municipality from a tax-exempt golf course, expressed as a percentage of actual revenue, can certainly be viewed as being net’ of any real estate taxes.” Mill River “reasonably took account of the somewhat reduced golf revenues generated at municipal courses by rejecting the market rent percentage of 30 percent for golf fees proposed by the county in favor of a reduced percentage of 27 percent, considering all issues, including a tax component.” The Appellate Division had found that such approach was not an “error.”

The subject court explained that “[a]lthough the valuation method accepted in Mill River Club was different from the method accepted by the Supreme Court in the case at bar, we nevertheless conclude that it was within the Supreme Court’s discretion to determine that the approach advocated by the… Club’s appraiser was the most appropriate under the circumstances,” “assuming the majority of comparable properties were operating under gross leases or, in the case of the municipal leases, the equivalent thereof; ‘grossing up’ the leases where appropriate, assuming the subject property would operate under a gross lease; and employing the assessor’s formula, including a tax load factor in the capitalization rate.” The court held that “the methods advocated by the… Club were fair and nondiscriminating, and were therefore ‘acceptable’….”

Accordingly, the court held that the trial court had not “double counted” when it adopted the club’s appraiser’s approach. The trial court had proceeded with the “the gross lease assumption, real property taxes were not a part of the equation until factored into the capitalization rate.” The court opined that “[i]t was reasonable to accept [the club's appraiser's] gross lease assumption, based, inter alia, on his determination to treat the municipal leases as gross leases because the tenants thereunder were not required to pay real estate taxes since the property was tax exempt.” Moreover, “in treating the municipal leases as gross leases, [the club's appraiser] properly made adjustments to the rent-to-revenue ratio in order to account for any restrictions which might be placed on greens fees.” It was also “proper to add a tax load factor to the capitalization rate in order to account for the cost of real estate taxes….”

Thus, the court affirmed.

Hempstead Country Club v. Board of Assessors, 2010-09220, NYLJ 1202627381463, at *1 (App. Div., 2d, Decided Nov. 6, 2013), Before: Dillon, J.P., Dickerson, Hall, Austin, JJ. Decision by Dickerson, J. Dillon, J.P., Hall and Austin, JJ. concur.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.