Scott E. Mollen
Scott E. Mollen ()

Landlord—Tenant—Rent Stabilization—Rent Overcharges—Apartment Stabilized Based on Acceptance of J-51 Tax Benefits—Post-’Roberts’ Issues—Rent Increases Based on Individual Apartment Improvements Could Be Challenged—Tenants Failed to Demonstrate Fraud—Mere Allegation of Fraud Insufficient to Justify Discovery

This case involved the issue, inter alia, of whether the subject apartment (apartment) “should be restored to rent stabilization [stabilization] because defendant [landlord]” had “ deregulated the apartment pursuant to the luxury decontrol laws while it was simultaneously receiving tax incentives under the City’s J-51 program … .” Following the “Roberts v. Tishman Speyer Props., L.P., 13 N.Y.3d 270 (2009) and its progeny applying Roberts retroactively,” the apartment was “returned to rent stabilization as of 2000.” The return of the apartment to stabilization triggered issues such as “the setting of the stabilized rent, the base date for, and the statute of limitations [SOL] applicable to, the setting of such rent, and the possible imposition of treble damages and attorney fees.”

The Appellate Division (court) agreed with the trial court that the plaintiffs (tenants) were “entitled to a declaration that the apartment was and still is subject to … stabilization and that they are … stabilized tenants … .” The court also agreed that “issues of the legal rent, … possible overcharge, treble damages and attorneys’ fees cannot be resolved on a motion for summary judgment.” However, the court disagreed with the trial court to the extent that the trial court had held that “increases made to the rent-stabilized rent in 2000, based upon individual apartment improvements” (IAIs) “before the [tenants] took occupancy, are subject to challenge on this record.”

The tenants moved into the apartment in Feb. 2000 and signed a two-year vacancy lease at a monthly rent of $2,200. The words ‘RENT STABILIZATION’ were crossed out in the heading of the lease,” as was paragraph 32, which referred to rent regulations. A lease rider contained the tenant’s acknowledgement that she had been advised that the apartment was exempt from stabilization.

“A” was the first stabilized tenant and had occupied the apartment before the tenants. “A” lived in the apartment until 1999. At that time, “A”‘s rent was $1,464 per month. Before the tenants moved in and while the apartment was still vacant, the landlord made IAIs to the apartment. The landlord’s records showed that the landlord spent $18,343.07, for such improvements. The landlord had increased the rent pursuant to a 20 percent vacancy increase and the “allowable percentage of the cost of IAIs … .” Two rent increases increased the rent to $2,215.38 per month. Since the new rent exceeded $2,000 per month, the landlord “decontrolled the apartment,” based on “luxury decontrol.” Notwithstanding the building’s enrollment in the J-51 tax abatement program in 2000, the landlord cited “the luxury decontrol laws” as a basis “to return the apartment to the free market. This was consistent with DHCR’s then view of the law. However, the Roberts decision held otherwise.

The current tenants had renewed the lease several times. In 2003, the tenants signed a two-year stabilized renewal lease at $4,076.18 per month. In 2014, shortly after tenant commenced this action, the landlord first filed annual rent registrations for 2009 through 2013. Each filing listed the “‘legal regulated rent’ that is higher than what the [landlord] charged under plaintiffs’ renewal leases and the amounts plaintiffs were actually charged in rent are denominated ‘prefer[ential] rents].’” “The … J-51 benefits have since expired.” The court affirmed the trial court’s finding that the tenants’ stabilized status is “retroactive to the inception of [tenants'] tenancy.”

Roberts held that “any … stabilized apartment that was luxury deregulated while also receiving J-51 benefits was improperly deregulated.” The Appellate Division had held that “an apartment … subject to … stabilization before receiving J-51 benefits reverts to its former pre-J-51 … stabilized status upon the expiration of those benefits … . The reversion to pre-J-51 benefit rent regulation includes the right of an Owner to seek luxury decontrol in appropriate cases .” However, the Appellate Division had “recognized that a tenant in occupancy at the time an apartment was improperly deregulated by a landlord receiving J-51 benefits retains its rent-regulated status for the duration of its tenancy … .” Thus, the landlord “had no right to return [the apartment] to the free market in 2000″ and “even though the J-51 benefits have since expired, the apartment was improperly deregulated and remains … stabilized.”

The landlord argued that there was “no basis to look beyond the four-year [SOL] applicable to rent overcharge complaints.” Generally, challenges to the amount of rent “must be made within a four-year [SOL] period” and “examination of the rental history is usually limited to the four-year period immediately preceding the filing of a complaint or petition … .” Four years before the subject action was filed, was Feb. 21, 2010 and that date is “the base date by which to calculate overcharges, if any.”

However, under certain circumstances, “especially where a landlord has engaged in fraud,” courts may examine the rental history beyond the four-year SOL. Here, the landlord had “disproved any fraud in the setting of rent when [tenant] first took occupancy.” The plaintiffs’ fraud claims in connection with the IAIs made in 2000 were “pure speculation and insufficient to create an issue of fact or warrant discovery … .”

The landlord had provided “documentation of the actual improvements” and had proven that “in 2000 these … plaintiffs were aware that the apartment had been removed from … stabilization pursuant to luxury decontrol.” Thus, the tenants could have challenged the rent at a time when they moved in. The tenants knew that the landlord had made some improvements. However, they sought further discovery with respect to the improvements. The court explained that “[a] mere allegation of fraud, alone, is insufficient to justify any further discovery … .” “Mere skepticism about the quality of the improvements or how extensive they were is insufficient to require any further inquiry,” particularly where the tenant had been the “first tenant to live in the apartment after the improvements were made.” The tenants had failed “to identify or contradict a single improvement the [landlord] claims it made” and a tenant had been given “sufficient notice of the increases to the rent at or about the time she accepted the lease and moved in so as to trigger any rights she had at the time to contest the improvements.”

Since the landlord had provided “itemized bills from contractors” and cancelled checks for the IAIs, the court held that the landlord was justified in raising the rent based on the vacancy allowance and the IAIs. The court further noted that it was permissible for a stabilized tenant in a building receiving J-51 benefits, to be “charged rent in excess of the vacancy threshold, while still retaining the other benefits of stabilization, including the right to renewal leases and capped increases … .”

Although there was “no evidence of fraud by the [landlord] in setting [tenants'] initial rent in 2000, and the base date for setting the rent [was] February 21, 2010,” the court held that the landlord’s motion for summary judgment had been properly denied. The landlord still had to prove “what the legally regulated rent was on the base date.” The landlord claimed that since it charged the tenants “$3,500 a month in rent pursuant to a lease and it later registered that rent with DHCR, that amount should be accepted as the legal, regulated rent for the apartment and used by the court to decide plaintiffs’ overcharge claims.” However, since the rent set by the lease was predicated on the landlord’s “misapprehension that [the apartment] was not subject to … stabilization,” there was no evidence … that the rent charged thereafter “was limited to lawful rent guidelines increases rather than fair market, unregulated rent.” The court explained that:

We cannot reconcile a mechanical application of CPLR 213-a and give effect to the retroactive application of Roberts, …, without considering the permitted … stabilization increases after the expiration of the 2000 lease and preceding February 21, 2010 … . Therefore, a determination of the legally permissible … stabilized rent that [tenants] should have been charged on the base date requires a mathematical calculation of the applicable rent guidelines (and any other) legally permissible increases since February 2002, the expiration date of the first lease.

Courts have recognized that “in a Roberts situation where an Owner had discontinued DHCR rent registrations based upon a justifiable belief that the apartment was not subject to rent regulation, it should not be penalized by rolling the rent back to the last registered rent. … However, …, an Owner cannot use the lack of registration or misapprehension of the law as a sword to establish a rent that clearly bears no relation to the appropriate parameters of rent regulation.” Moreover, “[t]he timing of these retroactive registrations may play a role in this case on the issue of willfulness.” The landlord had failed to register the apartment and readjust the rent until 2014, “when faced with this litigation” even though the landlord knew, from a prior litigation involving the same building, “an improperly deregulated apartment was required to be returned to … stabilization and that the base date rent should not have been set at the market rate … .” However, the landlord is entitled to an opportunity “to explain the reasons for such delay and the steps, if any, it undertook to bring itself in compliance.”

Accordingly, the court modified the trial court’s order which denied the landlord’s motion for summary judgment dismissing the complaint and granted the tenants’ cross motion for summary judgment declaring that the apartment is stabilized, “solely to declare that the increases made to the rent-stabilized rent in 2000, based upon IAIs before [tenants] took occupancy, were legally permissible, and otherwise affirmed, without costs.”

Taylor v. 72A Realty Assoc., L.P., 151560/14, N.Y.L.J. 1202788058828, at *1 (App. Div., 1st, Decided May 25, 2017), Tom, J.P., Richter, Gische, Gesmer, JJ. Opinion by Gische, J. All concur.

Commercial Landlord-Tenant—Yellowstone Injunction—Past Performance Exception to Statute of Frauds—Constructive Eviction—Defective Notice of Termination Had Not Been Withdrawn—Mootness Doctrine Exception for ‘Important and Recurring Issues Which, by Virtue of Their Relatively Brief Existence, Would Be Rendered Otherwise Nonreviewable’—Unexecuted Lease Was More Than a Mere ‘Agreement to Agree’—Landlord Had Accepted Security Deposit and Provided Keys

A chiropractor (tenant) sought a temporary restraining order against his landlord and a “Yellowstone injunction,” “to enjoin the termination or cancellation” of his commercial lease.

The tenant alleged that on or about April 12, 2016, he and the landlord agreed that he would rent the subject premises (premises) pursuant to a year-to-year tenancy. The tenant intended to utilize the first floor and parts of the basement. The tenant alleged that “his lease had a renewal option for an additional year” and permitted him to relocate, at his election, to a larger space “for a five year tenancy with renewal options.” The tenant claimed that pursuant to the lease, he was to pay $1,300 monthly rent, but “if he exercised the option to relocate,” the monthly rent would be $2,600. The tenant had paid and the landlord had accepted a $2,600 security deposit on or about April 12, 2016.

The tenant had received the keys on April 15, 2016 and took possession of the premises on April 21, 2016. The tenant asserted that the basement had not been “emptied as previously agreed or in move in ready condition.” The tenant allegedly had to use a shed or storage container to temporarily store his possessions on the premises. The tenant contended that the landlord had “breached his obligations,” by failing to deliver the basement empty, failing “to provide keys for access to the basement;” failing “to repair the building HVAC system;” failing to make repairs to doors, windows, and floors; failing to “provide a separate water meter;” and failing to provide power to the premises. The tenant alleged that power was resumed only after “police intervention.”

The tenant contended that the landlord had “constructively evicted him from the premises in part” and that “no rental payment is due to [landlord].” He also claimed that the landlord “interfered with or prevented access to the internet and telephones at the premises, further interrupting chiropractic services to his patients.” Although the tenant withheld rent payments for the months of June and July 2016, he asserted that he was “ready, willing and able to pay any and all rent due” should the landlord be entitled to such rent.

On June 1, 2016, the landlord served a lease termination notice (Notice) by leaving the Notice with one of the tenant’s employees. The Notice stated that the landlord intended to commence a landlord-tenant summary eviction proceeding by July 31, 2016. The tenant thereafter made the subject “Yellowstone” motion.

The tenant argued that the Notice contained an incorrect address, service by substituted service was otherwise improper, the landlord failed to provide “the requisite notice to cure,” failed “to particularize any specific breach of lease on tenant’s part” and that the Notice was sent by the landlord’s counsel, rather than by the landlord and there had been no “specific grant of such authority in the lease.”

The landlord made a pre-answer motion to dismiss the action. Since the landlord “conceded” that the Notice was defective,” because it specified “the incorrect … address …,” the landlord argued that the Complaint should be dismissed and the motion for injunction denied “on mootness grounds.” However, the landlord had not withdrawn the invalid Notice. The landlord had also argued that the alleged two year tenancy, based on the unexecuted lease, was, at best, a “month-to-month” tenancy and the alleged two year lease was invalid, because “it violates the Statute of Frauds” (SOF).

The court denied the tenant’s motion for a traverse hearing because the tenant did not dispute actual knowledge or awareness that he had received a copy of the Notice and “no hearing is required where the defendant fails to swear to ‘specific facts to rebut the statements in the process server’s affidavits’ … .”

The landlord argued that the Yellowstone injunction motion should be denied because there no longer exists any threat of eviction. However, the court explained that the mootness doctrine embodies an exception, which “permits courts to preserve for review important and recurring issues which, by virtue of their relatively brief existence, would be rendered otherwise nonreviewable,” especially where the “controversy or issue involved is ‘likely to recur, typically evades review, and raises a substantial and novel question.’” The court held that the subject dispute was not moot. The court cited “the substantive nature of the parties’ dispute” on the material terms of the lease and “whether or not a lease exists … .” The court noted that “the parties’ controversy is likely to reoccur in the future, and might evade judicial review if not addressed herein at the present … .”

The court then addressed, inter alia, whether the “part performance exception” to the SOF is applicable to the subject facts. The tenant argued that the “the lease is valid and has been executed.” The tenant cited the following provision of the alleged lease:

Confirmation of Lease: Receipt/Acceptance of the $2,600 security deposit, by the landlord, confirms acceptance of all conditions of the … lease agreement and that those conditions will be valid as is and/or incorporated into the full and final written lease. Terms of this agreement shall stand as the existing lease if a full and final lease is not signed by both parties … .

The tenant had submitted copies of two money orders representing payment of the $2,600 deposit by the tenant and acceptance by the landlord, that were “‘countersigned by [the landlord] on April 12, 2016.” Although the landlord had not signed the lease, the tenant argued that “by its express terms, the draft and unexecuted lease has ripened into a validly binding lease by operation of the instrument itself.” The tenant also argued that “[the landlord], by accepting the security deposit, providing [tenant] with keys and tendering delivery of the premises has partly performed under the key and material terms of the draft lease, thus taking the agreement out of the [SOF].”

The court explained:

The Statute of Frauds will not … bar … specific performance of a lease where it has been demonstrated . . that there has been partial performance of the lease, although such performance must be “unequivocally referable” to the agreement. Mere payment of money is not enough to constitute part performance … . “Unequivocally referable” conduct is conduct which is “inconsistent with any other explanation” … .

The court found that the unexecuted lease provisions addressed the “material terms,” including the parties, leased premises, the occupancy date, lease term, monthly rent, security deposit, “utilities, maintenance obligations, parking, and the HVAC system.” The landlord unsuccessfully argued that the lease’s lack of a provision for “commercial liability insurance” demonstrated that “the draft lease was a mere agreement to agree between [tenant] and [landlord] to formalize and execute a lease in the future.”

The court found that the SOF did “not bar consideration or operation of the unexecuted lease agreement … .” The court opined that the tenant had “adduced sufficient evidence at this early stage of litigation sufficient for an inference that [tenant's] payment and [landlord's] acceptance of the $2,600 security, tendered in two separate money orders signed for by [landlord] …, that [tenant] paid security as called for in the agreement. Thus, [the tenant's] security deposit and [the landlord's] delivery of the premises, including providing keys … were all … sufficiently specifically referable to the agreement as to constitute part performance.” The court further found that the unexecuted lease was not “a ‘mere agreement to agree.’” Thus, the court denied the landlord’s motion to dismiss based on the SOF.

Although a movant seeking a Yellowstone injunction need not meet the traditional tests for injunctive relief, it must demonstrate that:

(1) it holds a commercial lease, (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease, (3) it requested injunctive relief prior to both the termination of the lease and the expiration of the cure period set forth in the lease and the landlord’s notice to cure, and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises … .

The court held that the defective Notice is “null and of no effect.” Therefore, the tenant could not demonstrate that its lease was about to be terminated and “no adequate grounds presently exist” for an injunction. Finally, the court held that the tenant may maintain the subject action to pursue recovery for the alleged breaches of the landlord’s lease obligations.

Comment: Bill Ian Jurow, attorney for the tenant, advised that the landlord has moved for reargument.

Statler v. Dioguardi, 07432-2016, NYLJ 1202792677495, at *1 (Sup., SUF, Decided May 31, 2017), Ford, J.