Scott E. Mollen
Scott E. Mollen ()

Landlord-Tenant—Rent Stabilization—Lease Terminated—Tenant Profiteered by Subletting Apartment to 93 Customers Through Airbnb or 338 Days Over 18-Month Period—Dissent Asserts That Questions of Fact Should Preclude Summary Judgment

The Appellate Division, First Department (court) explained that “a rent-stabilized tenant who sublets her apartment at market rates to realize substantial profits not lawfully available to the landlord, and does so systematically, for a substantial length of time, places herself in jeopardy of having her lease terminated on that ground, with no right to cure….” The court found that this was “precisely what defendant did with the rent stabilized cooperative apartment….” Accordingly, the court held that the plaintiff was entitled to summary judgment on its cause of action for a declaration that it had validly terminated the lease and on its cause of action for ejectment, and as to liability on its claim “for recovery of the fair value of the use and occupancy of the apartment since defendant was served with notice of the termination of the lease.”

The defendant sublet her apartment to 93 different customers through the Airbnb website, “for 338 days spread over a period of 18 months…, at nightly rates ($95 for one person, $120 for two) far in excess of her stabilized rent, which was $1,758.01 per month…, equivalent to $57.80 per day.” The tenant was permitted by the Rent Stabilization Code (RSC) §2525.6(b), “to charge a 10 percent premium for an otherwise lawful sublet of a furnished rent-stabilized apartment, 110 percent of plaintiff’s stabilized rent, on a per-diem basis,” which was only $63.58. Thus, the defendant’s charge of $95 per night for single guests was “approximately one and a half times the lawful per-diem charge for a sublet, and the $120 she charged couples was nearly twice (approximately 189 percent) the lawful charge.”

The court explained that “evidence from the Airbnb website reveals that the blatancy of defendant’s commercialization of her apartment was comparable to that of tenants who have been evicted for profiteering in prior cases….” The defendant’s Airbnb listing included “links for making reservations,” “‘check-in’ and ‘check-out’ times,” “the financial penalty for untimely cancellation,” and “reviews from… past guests.”

The court found that the defendant had turned “her rent-stabilized apartment into a single-unit tourist hotel” which “enabled defendant to earn substantial profits, far in excess of the legally permissible 10 percent premium.” The subletting, after deducting Airbnb fees, yielded the defendant an income of $33,592. The stabilized rent that she had paid for the same 338 days amounted to $19,536.40. Thus, the defendant realized a 72 percent profit from her subletting—about seven times the lawful 10 percent premium permitted for lawful sublets of furnished rent stabilized apartments. The defendant overcharged her 93 subtenants, by approximately 56 percent.

The court rejected the defendant’s argument that “the 93 transient, short-term, paying guests… were ‘roommates’ within the purview of Real Property Law §235-f and RSC 2525.7″ and that the subletting was “de minimis[,] short term and insubstantial,” when “viewed in the context of a forty (40) year tenancy.”

Although the dissenting opinion asserted that the defendant “raised a triable issue as to whether the subletting was of substantial duration,” the majority opined that “[t]he implication of this analysis, in which whether the unlawful conduct was of sufficient duration to be considered material is determined by comparison to the total length of the tenancy, has the effect of rendering lawful for a longstanding tenant the exact same conduct that would be unlawful for a tenant who has a shorter history in his or her apartment.” The court asserted that the dissent offered “no support for its assumption that the relevant legal provisions were enacted with an intent to discriminate in this fashion between tenants based on the lengths of their tenancies.”

The court then stated that the “subletting of an apartment at an excessive rental rate for 338 days over a year and a half, or for 11 out of 18 months, has taken place on a sustained basis, not intermittently, and for a substantial period of time, and thus constitutes unlawful profiteering, regardless of the duration of the tenancy before the unlawful conduct began.”

The defendant also contended that “her profiteering was ‘insubstantial’ because her Airbnb income did not exceed her legal regulated rent plus 10 percent during several months of the subletting.” However, the court reasoned that the defendant had “sublet her apartment on a daily basis and, perforce, she had less Airbnb revenue in months during which her apartment was sublet for fewer days. To determine defendant’s profit from the subletting, her income from the subletting should be compared to the share of her rent attributable to the days she was actually hosting a subtenant in the apartment, not to her rent for the entire month during which the subletting occurred.”

The court also rejected the defendant’s argument that the plaintiff had knowledge of and gave consent to her subletting. Although the dissent thought that there are issues to be determined at trial, such as whether the defendant “acted with the knowledge of [management],” “whether defendant obtained the consent of [management],” and “whether the [management] had apparent authority to act for plaintiff,” the court found that the record lacked any admissible evidence that plaintiff’s managing agent (plaintiff’s agent), “ever knew of defendant’s subletting before it was advised of the practice… more than a year after the subletting began—by the [co-op's] managing agent….” Moreover, there was no admissible evidence to create a triable issue of fact as to “whether defendant’s alleged notice of her subletting to the [co-op's] managing agent was ‘binding’ upon plaintiff.”

The defendant’s claim that the plaintiff had notice of the subletting was based on her contention that “before she listed the apartment with Airbnb, she told an unidentified employee of the cooperative’s building manager about the plan, who told her that it would not be a problem as long as she provided the building staff with a completed visitor notification form for each guest.” The court explained that “any notice defendant provided to the building manager, an agent of the cooperative corporation,” (co-op) is a complete red herring, because her landlord—plaintiff in this action—was not the [co-op] but the holder of the proprietary lease for her apartment and the owner of the shares in the [co-op] appurtenant to that unit.”

The court noted that “[n]either defendant nor the dissent identifie[d]…admissible evidence that could support an inference” that the co-op’s building manager had “actual or apparent authority to act for plaintiff” or that the building manager “notified plaintiff of the subletting at any time before… the [co-op] sent plaintiff a letter, in June 2012, demanding that the subletting be brought to a halt.”

Additionally, the plaintiff and the co-op had been “represented by different property management companies.” The plaintiff’s agent was “A,” “the company that signed defendant’s renewal lease and sent her correspondence concerning the apartment, and to which defendant made her rent checks payable.” The agent for the co-op, was “B.” The court emphasized that the record was devoid of “any basis for treating notice to the [co-op's] managing agent as notice to plaintiff, or for deeming the acts of the [co-op's] managing agent to have been authorized by, or binding upon, plaintiff.”

Although the defendant testified in her deposition that the plaintiff’s agent “‘knew’ about her subletting,” the defendant had not cited any evidence that she ever notified any employee of the plaintiff’s agent of her Airbnb subletting. There was no evidence that “the visitor advice notification forms that she had supplied to the building staff” had ever been provided to the plaintiff’s agent.

Additionally, the court explained that “once substantial profiteering has been established, the tenant is subject to eviction without any right to cure, as a matter of law….” The court cited an Appellate Term decision, which stated:

The integrity of the rent stabilization scheme is… undermined if tenants, who themselves are the beneficiaries of regulated rentals, are free to sublease their apartments at market levels and thereby collect the profits which are denied the main landlord…. The tenant was commercializing with the apartment in a manner which defrauded his landlord as well as his subtenant. This practice, which the Rent Stabilization Law was designed to prevent, is not to be condoned by permitting the tenant to remain after the fraud has been found out….

Accordingly, the defendant was “not entitled to an opportunity to cure her breach.”

Although there are cases where “tenants who have overcharged their subtenants have nevertheless been permitted to cure,” those cases involved “illegal subletting” for a “short duration.” Here, the defendant did not allege that she cured by refunding the overcharges to any of the 93 former subtenants and since “defendant hosted 93… subtenants, with whom she had no direct financial dealings,” it appeared “that the overcharges… could not practicably be refunded.”

The court acknowledged that the “defendant’s age and health status naturally evoke sympathy” and “the forfeiture of a rent-stabilized leasehold is no small loss, especially after a tenancy that has lasted for more than 40 years.” However, the court found that this defendant had “exploited the governmentally-conferred privilege of her rent-stabilized tenancy to take financial profits unavailable to her landlord, well in excess of the permissible 10 percent premium for a furnished apartment.” The court emphasized that the defendant’s conduct “disregarded, not only the rights of her landlord, but also the rights of all of her fellow permanent residents of the building, whether shareholders or lessees.” The court noted that the other residents had not bargained “to share the building where they made their homes with a continuous stream of transient strangers… of unknown character and reputation, drawn to the building from all over the world by Internet advertising….”

A dissenting opinion asserted that the trial court had “correctly found that there are material issues of fact that precluded it from granting summary judgment as to plaintiff’s complaint….” The dissent noted that the defendant is 69 years old, had lived in the apartment since 1973 and in 2010, had been diagnosed with cancer and had been terminated from her job. She had undergone six operations and could not work for more than a year. As the defendant’s “financial situation worsened, she realized that, in order to pay her rent, she needed to find a roommate, but she found it difficult to do so.”

The dissent further observed that the defendant had spoken to the building’s property manager “who told her that it would ‘not be a problem’ as long as she completed and returned to management the building’s visitor advice notification form each time she had a guest.” Moreover, the plaintiff had not disputed that the defendant had “sought and obtained the approval of the property manager.”

The dissent also noted the defendant’s assertion that she reviewed each guest’s biography and had “continued to use the apartment as her primary residence, and cooked meals for each guest.”

The dissent further reasoned that:

The majority’s claim that defendant realized a 72 percent profit over 18 months is misleading…. First, those calculations are based on the amount she received above her legal rent, rather than in excess of her rent plus 10 percent. Second, plaintiff’s and defendant’s charts of the sums received by defendant differ in some respects. It is not clear whether each chart applies sums received to the month in which defendant received them or the month in which each guest stayed in defendant’s home.

The dissent stated that the amount of profit that the defendant may have realized is a question of fact which precludes summary judgment.

Additionally, the dissent noted that in holdover proceedings based on claims that a tenant defaulted under the subleasing provisions of a lease, in addition to any right to cure provided in the lease, tenants are entitled to “a 10-day stay of the warrant of eviction in order to cure the default (RPAPL 753[4]).” The dissent acknowledged that “where the tenant’s conduct rises to the level of profiteering, courts have found such conduct not subject to cure….” However, the dissent opined that “[t]here is no consistent legal definition of the term ‘profiteering’ in this context.” The dissent stated that “profiteering involves making an ‘excessive’ profit” and cases that have held the rent stabilized tenants should be “evicted for unlawful profiteering, generally involve tenants who charge two or more times the legal regulated rent….”

The dissent further stated that, given “the fact specific nature of this inquiry, allegations that a tenant engaged in rent profiteering should generally be decided at a plenary trial, and not on summary judgment….” Thus, the dissent would find that “there is a question of fact as to whether defendant engaged in profiteering, or rather used Airbnb to enable herself to continue to live in her long time home, which would not be inconsistent with the purposes of the Rent Stabilization Law.”

The dissent further noted that the defendant had engaged in “subletting for a short time (338 days over 18 months) relative to the length of her tenancy (43 years)” and other evidence indicated that the defendant had not turned “her apartment into a commercial enterprise, including that she asked permission from the managing agent before establishing her Airbnb account, reviewed the biographies of each guest and communicated with each before permitting them to stay in her apartment, resided in the apartment with each of her guests, gave management notice of each guest, and terminated her Airbnb account upon learning that there was any objection to her conduct and before being served with the notice of termination.”

The dissent believed that “the majority’s insistence that defendant’s actions… constitute profiteering ‘as a matter of law’ fails to take full account of the case law in this area, and the ways in which the facts of this case, as alleged by defendant, differ in significant respects from the facts in cases where profiteering was found.”

Accordingly, the dissent would find that the defendant had raised factual issues which precludes summary judgment, i.e., “whether defendant overcharged her subtenants, and, if so, in what amounts;… whether defendant acted with the knowledge of [plaintiff's agent], her landlord’s agent,… whether defendant obtained the consent of the building’s managing agent;… whether the managing agent had apparent authority to act for plaintiff;…whether defendant’s conduct rises to the level of profiteering requiring termination of her 43-year tenancy; and… if it does not, whether defendant has cured or can cure, including by refunding the amount of any overcharge to subtenants found to have been overcharged.” Thus, the dissent opined that the trial court had “appropriately denied summary judgment as to plaintiff’s complaint” and certain of the defendant’s affirmative defenses.

Goldstein v. Lipetz, App. Div., 1st Dept., Index No. 157826/12, decided May 23, 2017; Tom, J.P., Friedman, Richter, Kapnick, Gesmer, JJ. All concur, except Richter and Gesmer, JJ., who dissent in an opinion by Gesmer, J.