Scott E. Mollen
Scott E. Mollen ()

Landlord-Tenant—Lease Which Attempted to Move Apartment From Rent Control to Rent Stabilized Was Valid and Enforceable—Leases That Attempt to Circumvent Rent Regulation Violate Public Policy and Are Unenforceable—Parties Really Didn’t Know Proper Regulatory Status and Contemplated Clarification by Regulatory Authorities

This decision involves the validity of a 1975 lease for “three combined apartments that provided, inter alia, that the rent-regulated status of the combined unit would be changed from rent-controlled to rent stabilized.” The court did not depart “from long-standing precedent holding that leases that attempt to circumvent the rent laws or remove an apartment from rent regulation are void as against public policy, statute, and code….” Rather, it found that “the lease in this case, which explicitly contemplated the possibility that the apartment would not be decontrolled and expressly stated that the status of the apartment would be determined by the appropriate authority, which will bind the parties,” was valid.

The defendant tenant had moved into apartment B in or about 1963 as a rent-controlled tenant. In 1966, he also rented Apt. C. The “then-landlord,” allowed the tenant to combine Apts. B and C and make certain improvements. When Apt. A became vacant, the tenant sought to lease Apt. A and combine it with Apts. B and C. Since the landlord had prospective tenants ready to rent Apt. A, the tenant and the landlord agreed that the tenant would become “the prime tenant” for Apt. A and the prospective tenants would sublet Apt. A from the tenant and actually live in it. The subtenants remained in Apt. A through 1975. At that point, the tenant was ready to combine all three apartments.

Thus, the lease stated that the landlord would rent Apts. A-C to the tenant from Sept. 1, 1975 to Aug. 31, 1977 for $650 per month, with an option to renew for an additional three years. The lease further provided that the tenant at his own cost and expense would make repairs to Apts. A-C and to any part of the building damaged by the tenant. If the tenant failed to make such repairs after notice from the landlord, the landlord could make the repairs and charge the cost thereof as “additional rent.” The lease also contained an attorney fees provision.

A rider to the lease showed that the parties contemplated that Apts. A-C “would move from rent control to rent stabilization.” Specifically, the lease provided:

[T]he provisions of this lease respecting length of term, renewal options and amount of rent, have been agreed upon…on the express understanding that the former three apartments comprising the area which is being leased to the Tenant…will be recognized by the appropriate authority having jurisdiction to be free of the restraints and limitations of the provisions of the Rent Control Laws…and to be subject only to the Rent Stabilization Act.

However, the parties acknowledged that the combined apartment may not be decontrolled and provided:

[I]f…the parties are prohibited or precluded from following the procedure described under (i) or (ii)…the rent will be determined by treating the unit as though (a) the separate decontrolled rent for former apartment [A]…for the Basic Term [i.e., Sept. 1, 1975-Aug. 31, 1977] is $270.00 per month and (b) the monthly rent for the Renewal Term for that former apartment [A] would be $270.00 plus the maximum allowable increase under Rent Stabilization…and (c) the rents for the former apartments [B] and [C] shall be equal to the maximum collectible rents that would be permitted…under the…rent control laws.

The lease permitted the tenant to do certain renovation and alteration work at its cost. However, the landlord would be “under no obligation,…, to make any repairs to any equipment, fixtures,…, or facilities constructed, altered,…by the tenant or installed by [him]…or any repairs made necessary by reason of [his] acts or omissions.” Additionally, the tenant was obligated to maintain his “installations without any obligation on the part of landlord.”

Thereafter, there was confusion as to whether the premises were subject to rent stabilization, rather than rent control. The landlord argued that the combined apartment should be “decontrolled because it necessarily had to be vacated by the tenant while the alterations were being made, and, in addition,…the tenant agreed to such decontrol in the lease…” The tenant countered that if he had to “temporarily…live elsewhere during the alteration,” that was “not such vacating as contemplated by the Rent Law” and any agreement whereby a tenant waives “the benefit of any provision of the Rent Law or regulations is void.”

In September 1976, a District Rent Director (DRD) found that Apt. A was decontrolled. In January 1980, a DRD decontrolled the entire A-C apartment. However, in 1981, the commissioner of the NYC Dep’t of Housing, Preservation and Development (HPD) revoked the January 1980 order. HPD determined that the fact that the tenant may not have had full use of the former apartments during the alterations, did not constitute “vacating within the ambit of Section 2f(17) of the Regulations.”

The tenant had continued in occupancy and the accommodations remained “subject to control.” A further litigation ensued over the amount of rent set in a 1981 Division of Housing and Community Renewal (DHCR) order. In 1985, a District Rent Administrator (DRA) set the maximum rent on the basis of the “‘first’ rent of $650 [set forth in the parties' lease] but…updated it to reflect annual Maximum Base Rent adjustments from 1976 through 1985 plus certain service increases resulting in a rent of $1,184.01 per month plus a $57 per month fuel cost adjustment.” The tenant appealed, but DHCR affirmed the DRA’s order.

In 1992, the tenant and the current landlord disagreed as to repairs and maintenance to the tenant’s apartment. The landlord claimed that he did not have to pay for repairs since the tenant had installed the subject improvements and was responsible for their maintenance and repair. The tenant asserted that once the improvements were installed, “these permanent structural components are legally…[the landlord's], as is the responsibility for their maintenance.” A DHCR opinion letter stated that when a tenant installs their own fixtures and equipment, the tenant is obligated to maintain or repair such items. That opinion letter was not a formal agency order that had been issued on prior notice to all parties, with all parties being afforded an opportunity to be heard.

In 2013, part of the bathroom ceiling of Apt. C fell due to water damage. The landlord claimed that the damage was caused by the tenant’s shower in Apt. C. The tenant claimed that “it was caused by a clogged and/or defective drain pipe.” The landlord commenced the subject action and sought a declaratory judgment, injunction, damages and legal fees.

The landlord had moved for summary judgment on its claims for a declaratory judgment and for a permanent injunction. The tenant cross-moved for summary judgment dismissing the action. The tenant argued, inter alia, that the subject lease is “void ab initio and unenforceable because it was an ‘improper attempt to decontrol’ the apartment” and that the landlord has an adequate legal remedy. The trial court denied both motions, finding, inter alia, that “triable issues of fact precluded summary judgment” for either side.

On appeal, the Appellate Division (court) explained that “parties to a lease governing a [rent-regulated] apartment cannot, by agreement, incorporate terms that compromise the integrity and enforcement of the Rent Stabilization Law [and Rent Control Law]….” Thus, courts have “uniformly thwarted attempts, whether by mutual consent or by contract of adhesion, to circumvent regulated rent maximums….” Rent Stabilization Code §2520.13 states that “[a]n agreement by the tenant to waive the benefit of any provision of the [Rent Stabilization Law] or this Code is void.” The Rent Control Law contains similar language.

Notwithstanding the foregoing, the court held that the lease was not “void as against public policy.” Unlike the leases invalidated in prior cases, because they attempted to circumvent rent regulation, “the subject lease did not seek to completely deregulate the apartment….” Here, the parties “did not know the rent-regulated status” of this apartment and “merely tried to move the apartment from rent control to rent stabilization with certain concessions, and set out terms for such a transition, if possible.” In prior cases, there was “no uncertainty about the rent-regulated status of the apartments and no question that the parties knowingly attempted to circumvent the rent laws.”

The court emphasized that the subject parties’ “confusion was well founded” and cited the “conflicting determinations concerning the legal status of this apartment from Rent Administrators, HPD’s commissioner and DHCR regarding the apartment’s status.” Moreover, the lease provided for “the possibility that the apartment could not be treated as intended by the parties” and “that they might be ‘prohibited or precluded’ from enforcing their intended procedure.” The lease contemplated that the parties would not seek to “evade regulatory coverage, but that they would seek approval of their agreement by the DHCR.” Thus, this case “is distinguishable from those involving leases which knowingly and purposely sought to evade the rent laws.

Moreover, after years of proceedings before DHCR, “the landlord complied with the ultimate determination by DHCR that the apartment was not decontrolled and charged [tenant] the legal rent set forth by the rent administrator and DHCR.” Here, “there was never any risk or intention to either completely deregulate the apartment or to circumvent regulated rent maximums.”

Additionally, even if the portion of the lease which tried to shift the apartment from rent control to rent stabilization “were void, the rest of the lease (including the paragraph requiring [tenant] to repair damage caused by him) would still be valid.” The main objective of the lease was not to “illegally deregulate the apartment thereby voiding the entirety of the lease….” The lease “had multiple objectives, one of which was confirmation of the landlord’s permission of [tenant's] renovation and alteration of [Apts. A-C].” Since the court found that the lease was valid, the court did not consider the landlord’s argument that the tenant “should be equitably estopped from denying the lease’s enforceability. That claim is academic, and,…unpreserved.” Thus, since the lease was valid, the court held that the tenant’s obligation “to repair and maintain tenant-made improvements and be responsible for resultant damages,” are “valid and enforceable.”

The court dismissed the landlord’s claim for a permanent injunction, since the landlord “failed to establish that it [did] not have an adequate remedy at law,” i.e., monetary damages. Since the lease was deemed valid, the court rejected the tenant’s argument that the landlord’s claim for attorneys’ fees should be dismissed.

Accordingly, the court granted the landlord’s motion to declare that the lease and the rider provisions with respect to the tenant’s “obligation to repair and maintain tenant-made improvements and be responsible for resultant damages, if any,” were “enforceable,” and granted the tenant’s cross motion to dismiss the permanent injunction and a second declaratory judgment cause of action.

204 Columbia Hgts. v. Manheim, 161520/13, NYLJ 1202777603556, at *1 (App. Div., 1st, Decided Jan. 19, 2017), Opinion by Tom, J.P. Renwick, Manzanet-Daniels, Gische, Webber, JJ. All concur.