R Randy Lee ()
The real estate market has surged in the past few years and the incentive to increase rental income is strong. Investors are seeking to take advantage of the market for more affordably priced one, two, and three-family homes by illegally adding rental units. They, as well as the lawyers representing them, should be wary of New York rules and decisions favoring the occupancy rights and rent payment obligations of tenants in buildings with illegal apartments.
Before advising clients of the law as it applies to the property they are purchasing, attorneys should conduct an extra measure of due diligence in order to provide the most reasonable advice to their clients. This advice is best communicated in writing.
Given the financial benefit of modifying an existing property, owners will often take the risk of converting a basement or an attic into a separate rentable unit, or even splitting an existing larger unit into two smaller ones, despite almost certain building code violations and multiple dwelling registration requirements. Property owners, who have engaged in this practice, can attest that renting apartments without the proper certificate of occupancy or multiple dwelling registration is not only illegal, but when uncovered, will prove to be bad business that courts strongly disfavor.
In fact, the Appellate Division has continually reaffirmed its decision in Sheila Properties v. A Real Good Plumber, 874 N.Y.S.2d 145 (App. Div. 2009), that “[a]n owner of a de facto multiple dwelling who fails to obtain a proper certificate of occupancy or comply with the registration requirements of the Multiple Dwelling Law (MDL) cannot recover rent or use and occupancy.” The Appellate Division, Second Department (with jurisdiction over the ten downstate counties of Richmond, Kings, Queens, Nassau, Suffolk, Westchester, Dutchess, Orange, Rockland, and Putnam) has also consistently ruled in favor of the tenant on this issue. In Caldwell v. American Package, 866 N.Y.S.2d 275 (App. Div. 2008), the court held that a landlord, who allowed tenants to live in a commercial building he owned for which there was no residential certificate of occupancy was not entitled to collect rent or the value of the use and occupancy.
Ability to Collect Rent
Those navigating these waters should understand New York state’s MDL and its impact on residential realty, because an owner who fails to obtain a certificate of occupancy or comply with building registration requirements will lose regardless of a booming economy. Generally, §4(7) of the MDL permits tenants of multiple dwellings (defined as buildings, including houses, occupied by at least three families living separately) to withhold rent where an owner does not obtain a valid certificate of occupancy or where the owner coverts the building into a multiple dwelling without obtaining a new certificate, thus making it a de facto multiple dwelling. Not only does this action allow the tenant to withhold the rent, but MDL §302(1)(b) bars landlords from bringing actions and summary proceedings for non-payment.
The most common actions that trigger the MDL are converting a two-family to a three, or converting a three-family to four or more. A one-unit building converted to a two-unit property is not considered a multiple dwelling, but the occupancy is nevertheless illegal.
One-family properties modified to add a second separate living space are sometimes characterized as a “mother/daughter,” when the residents are family members. For instance, the Town of Hempstead, New York provides an exception to restrictions on illegal apartments for mother/daughter houses where the owner adds a second kitchen for separate living. The town considers the residence a single-family home, but the certificate of occupancy indicates that it is a mother/daughter house for the exclusive use of a child or a parent.
The city of New York is not so forgiving, as far as the so-called mother/daughter designation is concerned. A fully outfitted area within a residence (not separated) that is occupied by a family member, so long as it is code compliant may be tolerated, but will always be considered a single one-family residence on the certificate of occupancy. It cannot be legally rented.
Certificate of Occupancy
MDL §301 specifically prohibits occupancy in whole or in part until the issuance of a certificate of occupancy, which indicates that the dwelling conforms in all respects to the requirements of the MDL, the building code, and all other applicable laws. Its longstanding purpose is to ensure tenant safety, as well as compliance by the property owner. In B.S.L. One Owners v. Rubenstein, 159 Misc.2d 903 (Civ. Ct. 1994), the court highlighted, “The owner’s preclusion [from collecting rent] derives solely from the owner’s failure to obtain a certificate of occupancy for the premises and terminates once the certificate is issued. The statute’s conditional provision motivates an owner to expeditiously correct, modify or repair the premises to conform with housing standards prescribed by law, and relieve the tenant from unsafe, substandard living conditions.”
Number of Units Is Critical
Where a property is a legal two-family dwelling, but houses three or more families living independently, the premises constitutes a de facto multiple dwelling. So, while a landlord can maintain a holdover proceeding to recover premises occupied in violation of the certificate of occupancy, it cannot do so to recover rent for use and occupancy, since property lacks a proper multiple dwelling registration.
More important than lost rent, owners of illegal apartments may face criminal charges for injuries or deaths that result from hazardous housing. In a prosecution that resulted from a 2010 fire in a Brooklyn building killing five people, several of whom were trapped inside illegally partitioned apartments, the landlord pleaded guilty to criminally negligent homicide. In another case, prosecutors charged a landlord in Queens, alleged to have rented illegal apartments to 50 people, with reckless endangerment and other crimes.
Rulings Favor Tenants
Since the courts clearly favor the occupants of illegal apartments, landlords are rarely successful—and then only when they act in good faith—and have been thwarted by legal obstacles. For example, in Hornfeld v. Gaare, 515 N.Y.S.2d 258 (App. Div. 1987), the landlord leased the basement of his building to the tenant specifically for storage of business machines and no other purpose; the certificate of occupancy did not allow residential use of the basement. The landlord subsequently rented this space as a residence and tried to register and bring the space into compliance with the statute, but the required remodeling was structurally impossible, and the tenant continued to live there in violation of his lease term and the MDL. The court ultimately required the tenant to vacate the apartment following the expiration of his lease and surrender the premises to the landlord, but barred the landlord from collecting rent for use and occupancy.
Legal Tenant Withholding Rent
In Mannino v. Fielder, 165 Misc.2d 605 (Civ. Ct. 1995), the court held that even a tenant in a legal apartment in a two-family house featuring an illegal third unit may raise the landlord’s non-compliance with the MDL to prevent proceedings for non-payment of rent. Although the landlord claimed that a multiple dwelling registration was unnecessary because a certificate of occupancy covered the structure as a two-family house with a garage, and the non-paying tenant occupied one of the otherwise legal apartments, the court held that the presence of the third family made it a de facto multiple dwelling and strictly applied the MDL. The absence of a multiple dwelling registration, therefore, precluded the non-payment proceeding. Mannino confirmed that it is irrelevant where in the building the tenant in question lived, so long as the building, as a whole, was not properly registered.
Compliance Is Paramount
In cases involving illegal apartments, both tenants and landlords need to have a clear understanding of their rights and remedies. With that knowledge, tenants may be able to use an alleged non-conformity as a justification to withhold rent, since even “legal” tenants covered by a valid certificate of occupancy can use the unlawful presence of a third family in an attic, garage or basement apartment to justify their non-payment, landlords should evaluate their actions considering these potential consequences.
Prior to purchasing a property, prospective landlords should review the building’s history with the appropriate administrative agencies and confirm that the proper certificate of occupancy is on record. This is paramount because in addition to lost rent, there are penalties for violations that can accrue daily. Beyond regulatory agencies, the creation and renting of an illegal unit might very well violate the terms of the property owner’s insurance policies, and lead to a denial of coverage.
Given the potential criminal risks, administrative difficulties, and burdensome time commitment required without the benefit of continuing revenue or any assurance that an illegal condition can be corrected, attorneys representing potential purchasers need to fully advise their clients, in writing, of the potential civil, financial and criminal risks attendant to any plan to purchase or “illegally” modify a one, two, or three-family home, being purchased for investment, or to occupy same, with the extracurricular income being counted on to make it affordable to them.