Scott E. Mollen
Scott E. Mollen ()

Commercial Landlord-Tenant—Net Leases—Obligation to Make Repairs

The Appellate Division (court) held that the trial court had erred in dismissing the defendant’s counterclaim for breach of the lease requirement that the tenant

take good care of the premises…building-wide systems,…[and] sidewalks “and” make all repairs…necessary to keep the same in good and safe order and working condition…whether…necessitated by wear and tear, obsolescence or defects, latent or otherwise…. The lease further provided that “the necessity and adequacy of repairs made shall be measured by standards…appropriate for first class New York City office buildings of similar age, construction and use.”

The court rejected the plaintiffs’ argument that the lease required merely that “building -wide systems be working….”

The court found that the landlord established a prima facie case that the building systems and sidewalks had “not remained current ‘in touch with the times,’ during plaintiffs’ tenancy and were no longer appropriate for a first class building at the time of defendant’s service of the notice of default….” The court noted that although the landlord failed to provide “evidence of the systems in comparable first class buildings,” such failure may impact the “ultimate weight given to defendant’s evidence.” However, “it did not warrant a dismissal for failure to prove a prima facie case.”

The court further held that the trial court had properly determined that the “fair and reasonable” meaning of the term “expenses” in the net cash flow provision of the subject leases, did not encompass reserves required to be set aside by the landlord (defendant) “as a condition of refinancing.” The court considered the “expense” term in the context of the parties’ negotiation history, as evidenced by prior drafts of the leases and the testimony of witnesses involved in the negotiation. Although the defendant argued that such interpretation did not make business sense, the court would not “rewrite the contract to insert a provision expressly excluded….” Additionally, “the business context sought to be introduced by defendant had no connection with the parties’ dealings….”

The court also noted that since the breach of contract claims accrued on three different dates, “statutory prejudgment interest on the damages for each claim should be computed from the date on which those damages were incurred….”

Accordingly, the court directed that the trial on the counterclaim be reopened and remanded to the same trial judge for a continued trial at which plaintiff will have the opportunity to defend.

Building Service Local 32B-J v. 101 Limited Partnership, App. Div., 1st Dept., Index No. 652266/10, decided, March 28, 2017, Andrias, J.P., Feinman, Gische, Gesmer, JJ.

Rent Stabilization—Court Upholds NYC Rent Guidelines Board Determination—Board Was Entitled to Consider “Tenant Affordability” When Establishing Annual Guidelines for Rent Adjustments

The petitioners had commenced an Article 78 proceeding, “seeking to annul the 2016 Apartment & Loft Order #48 promulgated” by the NYC Rent Guidelines board (RGB). The RGB had cross-moved to dismiss the petition.

RSL §26-510 (b) provides in part that:

The rent guidelines board shall establish annually guidelines for rent adjustments, and in determining whether rents…shall be adjusted shall consider, among other things (1) the economic condition of the residential real estate industry…including such factors as the prevailing and projected (i) real estate taxes and sewer and water rates, (ii) gross operating maintenance costs (including insurance rates, governmental fees, cost of fuel and labor costs), (iii) costs and availability of financing…, (iv) over-all supply of housing accommodations and over-all vacancy rates, (2) relevant data from…cost of living indices…, (3) such other data as may be made available to it….

Order 48 was enacted pursuant to such statute. The petitioners asserted that the RGB should not have considered “‘tenant affordability’ as a factor in issuing Order 48,” since “tenant affordability” is “beyond the scope of the board’s authority under RSL §26-510 (b).” The RGB countered that “‘tenant affordability’ has long been a consideration in its deliberations and is authorized by the statute.”

The court cited a prior trial court decision held that “one of the factors that the board chose to consider was the tenants’ ability to pay” and that such consideration “was entirely proper and consistent with the statutory authorization embodied in [RSL §26-510]….” That prior decision had been affirmed by the Appellate Division, First Department, without opinion. The court also cited a prior decision of a District Court in the Southern District of New York, had held that:

the Legislature gave the board this power in RSL §26-510(b) when it allowed the board to consider, “among other things” (1) “the economic condition of the residential real estate industry,” (2) “relevant data from the current and projected cost of living indices,” and (3) “such other data as may be made available to it.” The law gives the board great latitude in deciding what factors to examine and what weight to place on each factor.

That decision was affirmed by an unpublished decision in the U.S. Court of Appeals for the Second Circuit. The Second Circuit held that “no due process violation exists because any consideration of tenant hardship occurred in the context of a statutory scheme that ‘represents a rational attempt to accommodate the conflicting interests of protecting tenants from burdensome rent increases while at the same time ensuring that landlords are guaranteed a fair return on their investment.’”

The petitioners argued that the aforementioned decisions lack “precedential value” because there was no written opinion in the aforementioned Appellate Division decision and “the local rules of the Second Circuit do not permit citation” to its decision. However, the court observed that “whatever the binding precedential value of those cases, petitioners here have failed to present any legally cognizable argument as to why those cases were wrongly decided.”

Additionally, the petitioners asserted that the factors listed in RSL §26-510(b) are “exclusive” and pursuant to “the principle of ejusdem generis, the board is only permitted to consider items related to landlord costs such as set forth in RSL §26-510(b)(1) despite the language in subdivision 3 of statute allowing the board to consider ‘such other data as may be made available to it.”

However, the court cited New York State Court of Appeals precedent which held that “the board could consider tenants’ economic circumstances in its deliberations, in a case where the [petitioner] appeared as amicus curiae.” The court further opined that the Court of Appeals had “indicated that the board could take into account the effect rent policy would have on tenants’ economic circumstances and could determine that distinctions in rent policy and any implicit subsidies therein should be adjusted to eliminate unfairness.” The New York State Court of Appeals had further held that “where the board has long employed certain methods and exercised certain powers without challenge as is the case here with ‘tenant affordability,’ ‘the fact that such distinctions have long been accepted without question is further confirmation that nothing in the governing legislation can fairly be read to prohibit them.’”

The petitioners had also argued that the New York State Court of Appeals had “in dicta stated that ‘it could be argued that, in making distinctions based on tenant income, the [] Rent Guidelines board trespassed on a sensitive policy area that is within the Legislature’s special province….” However, the court noted that the New York State Court of Appeals was “referring to a situation where ‘distinctions’ were being made in setting rent policy where in this case no ‘distinctions’ are being made because of ‘tenant affordability.’” 
The petitioners had previously withdrawn with prejudice, their cause of action asserting a regulatory taking. Accordingly, the court granted the RGB’s cross motion to dismiss the petition.

Comment: Disclosure—My firm has represented the Rent Stabilization Association of New York City and I previously served as Chairman of the NYC Rent Guidelines board.

Rent Stabilization Assoc. of NYC, Inc. v. N.Y. City Rent Guidelines Board, 101079/16, NYLJ 1202784461943, at *1 (Sup., NY, Decided March 28, 2017), James, J.

Landlord-Tenant—Petitioner’s Motion for Leave to Reargue Court Order Dismissing Summary Proceeding Denied—The Term “Occupant” Is Equivalent to “Tenant” for Purposes of Service Under RPAPL Section 735—Substituted Service to “Exhibit” the Referee’s Deed Does Not Meet the Statutory Criteria—Court Suggests That Legislature Permit Substituted Service and “Nail and Mail,” Because There Is No “Valid Reason” to Set Such a High Standard for Service of the Referee’s Deed When Service of the Notice of Petition and Petition Is Allowed by Personal Service, Substituted Service or “‘Nail and Mail’”

This decision involved a summary proceeding which had been commenced against the former owner of the subject property. Additional respondents allegedly reside in the premises with permission from the former owner. The petition stated that a foreclosure sale had been held and a copy of the judgment was annexed as an exhibit to the petition. A certified referee’s deed was also annexed to the petition. The petition alleged that respondent “A” continued to reside at the premises, even though the judgment of foreclosure and sale provides that the purchaser “be let into possession of the premises upon production” of the referee’s deed.

The petition further alleged that all of the respondents had been duly served with 10-day notices to quit and that a certified copy of the referee’s deed had been exhibited to the respondents. An affidavit of service stated that the holdover notice of petition and holdover petition had been served by delivering a copy of the documents to “A,” “a person of suitable age and discretion.”

The court had dismissed a prior proceeding, because the certified deed had been exhibited to respondent “B” by “substituted service upon ['A'].” The court had held that the certified deed “must be exhibited personally to each respondent and not by substituted service, as required by Home Loan Services v. Moskowitz, 31 Misc 3d 17, 920 NYS2d 569 (App Term, 2d, 11th & 13th Jud. Dists, 2011)” (Home Loan).

The petitioner argued that “service in Home Loan…was invalidated because same was done by nail and mail which is not the equivalent of personally exhibiting the certified deed.” The petitioner claimed that “exhibiting the certified deed by substituted service to ['A'] satisfies RPAPL Sections 713(5) and 735.” The petitioner cited a New York State District Court decision and a Civil Court decision “for the proposition that substituted service satisfies the statutory criteria of personally exhibiting the certified deed to a respondent.”

Respondent “B” argued that he had been “identified in the proceeding as a ‘John Doe,’” notwithstanding that the petitioner knew his name from a prior proceeding. However, “B” had been identified by his real name when service was made.

The respondent further argued that service was defective because it failed to comply with RPAPL 735. The respondent contended that service upon “A,” identified as an occupant was jurisdictionally defective. The respondent asserted that RPAPL §735 “requires service upon a person who resides at the premises and that service upon an occupant doesn’t satisfy this criteria.” The respondent argued that “merely being an occupant is insufficient as the person so served could have been merely a guest, a visitor, etc.” Additionally, the respondent asserted that “the court’s prior reliance upon Home Loan…was correct, since that Appellate Term decision has not been overruled.”

The court held that service upon an occupant was sufficient. The court explained that “[t[he term occupant is equivalent to tenant" and therefore service upon "A" was sufficient under RPAPL Section 735. Prior judicial precedent held that:

'To occupy' means 'to take and hold possession of' or 'have in possession and use'…and an 'occupant' is one who holds possession and exercises dominion…. 'To occupy' is also defined to mean 'to tenant', 'to reside', 'to inhabit'…and, in landlord-tenant law at least, connotes a possessory interest whereby the occupant will hold or use for more than brief periods of time…."

The court opined that it was "constrained to follow the holding of Home Loan…. which requires the referee's deed to be 'exhibited to respondent.'" Thus, "personally exhibiting the referee's deed is required, and…substituted service or service by 'nail and mail' is insufficient." The court further noted that "[t]o exhibit connotes actual presentation to view the document….” In the subject case, “a certified copy of the deed has not been exhibited, as that word is commonly used and understood, to the occupants who received substitute service.” Thus, the plaintiff had “not yet met the statutory requirements for issuance of a writ of assistance.” The court also cited Rasch’s New York Landlord and Tenant, §35:8 (4th Ed.).

Based on the foregoing precedent, the court held that “substituted service to ‘exhibit’ the referee’s deed does not meet the statutory criteria….”

The court was “very empathetic to the holdings” cited by the respondent, for the proposition that “substituted service of the referee’s deed was valid” and suggested that “[t]he Legislature needs to address this situation.” The court reasoned that “both substituted service and ‘nail and mail’” should be authorized. The court opined that “[t]here is no valid reason to set such a high standard for service of the referee’s deed when service of the notice of petition and petition is allowed by personal service, substituted service, or ‘nail and mail.’ Money judgments are issued upon substituted service.” Thus, the court dismissed the action.

Bank of America v. Lilly, LT-005187-16, NYLJ 1202784909766, at *1 (Dist., NA, Decided March 28, 2017), Fairgrieve, J.