The New Rules of Seeking a Buyout of a Rent-Regulated Tenant
By Adam Leitman Bailey and Dov Treiman
January 29, 2019
In their Rent Regulation column, Adam Leitman Bailey and Dov Treiman discuss how recent changes to the New York City Administrative Code along with a recent decision in the Appellate Term, First Department, have made landowners who seek to buy out the rights of tenants in occupancy face a minefield of requirements and restrictions.
One of the most fascinating parts of being a real estate lawyer is negotiating the selling of rights to a rent regulated tenancy to a landlord. These deals have seen tenants made into multi-millionaires and landlords given the ability to build high rise buildings after such buyouts. Now, this symbiosis of dreaming dreams and making them come true is under threat by existing case law and new laws already enacted and politically promised.
Under these threats, in the New York City real estate industry, both from landlords who seek to free their apartments from regulation and from tenants who wish to cash out the value of their apartments’ potential unregulated value, there is pressure to reach deals rapidly, before, if as promised in recent campaigns, the reasons for the deal are rendered obsolete.
However, between recent changes to the New York City Administrative Code and a recent decision in the Appellate Term, First Department, landowners who seek to buy out the rights of tenants in occupancy face a minefield of requirements and restrictions. Done properly, the landowner can recapture the apartment for other uses and seriously increase the rent. Done improperly, the landowner will still have the tenant, may face crippling fines, and, at least in certain parts of the city, may be prevented from effecting even the most benign improvements to the building where the apartment is located, having to surrender the building to considerably more rigorous regulation.
Buyout Agreements: Basic Rules
The most common form of regulation in New York City is Rent Stabilization. Under Rent Stabilization Code (RSC) §2520.13, waivers of protections under the Code are void as against public policy. Draper v. Georgia Props. Inc., 230 A.D.2d 455, 660 N.Y.S.2d 556 (1st Dept. 1997). While it is generally believed that §2520.13 allows for agreements, provided they are either before a court or the DHCR, in fact, the exception §2520.13 carves out is only for agreements where the tenant is represented by counsel and the agreement is withdrawing a complaint before the DHCR.
There is no generalized provision in the Code allowing for agreements to be enforced merely because they were before the court or the DHCR. Actual practice reveals, however, that the courts are more inclined to enforce agreements where there are attorneys on both sides and for this reason, landlord’s counsel seeking to negotiate a buyout agreement is well advised to insist on having a licensed attorney on the other side, even if the landlord has to pay for it.
On its face, it would appear that a tenant who agrees to move out of a rent stabilized apartment at all would be bumping up against §2520.13. However, such is not the body of case law. Once the tenant moves out, the tenant is theoretically no longer a “tenant” and therefore has no protections under the RSC to waive. However, tenants who remain in residence remain protected under the law to their last minute. The challenge to both landlord’s counsel and tenant’s is to devise agreement structures that are both enforceable and give word to the parties’ desires.
If there is a genuine dispute about entitlement to the apartment, or the tenant is actually in arrears, this is readily accomplished. Merwest Realty v. Prager, 264 A.D.2d 313, 694 N.Y.S.2d 38 (1st Dept. 1979). The landlord can bring an eviction proceeding that can be settled on terms that actually include the eviction. Draper, supra. RSC §2520.13 by its terms make court-supervised surrender agreements fully enforceable, but only as to the tenant who is involved in the negotiations, not as to any subsequent tenant.
While under current law, a current tenant whose rent is below the deregulation threshold receives a path to perpetual regulation if the tenant consistently takes one year lease renewals, the opportunity for deregulation between tenancies remains landlords’ principal motivation to buy tenants out of their tenancies. (Bailey & Treiman, “Altman” Alters Vacancy Deregulation, NYLJ, May 2, 2018)
Absent a genuine controversy between the parties other than how much the landlord is willing to pay to recapture the apartment, an agreement calling for eviction may not be enforceable. The lower courts take the authority from Draper to examine whether the agreement was coercive in nature and their resultant findings are not necessarily predictable.
Without certainty that the court will enforce the deal, the agreement must contain incentives sufficient to entice the tenant to comply with the contractual obligation to vacate. These incentives therefore make substantial up-front payments ill advised. On failure of the tenant to vacate, the courts may render a money judgment for the return of any funds the landlord advanced, but even that modest relief to the landlord is not assured. Grasso v. Matarazzo, 180 Misc.2d 686, 689, 694 N.Y.S.2d 837 (App. T. 2d Dept. 1999) holds that where the landlord has acted seriously coercively, the courts will not even direct return of the funds.
Landlord’s counsel are therefore advised to keep up-front payments small or tied to securing the services of movers and to keep the bulk of the funds to be remitted upon departure, with or without escrowing of the vacatur funds in the meantime. Tenants’ counsel wisely require the landlords’ counsel escrow the vacatur funds and notify tenants’ counsel early in the period from execution of the deal until actual surrender of the apartment that the funds have reached the escrow account. If the escrow agent is a reputable firm, there is no need that the actual remittance to the tenant be in certified funds.
New “Harassment” Laws
Lumped into the definition of “harassment” in New York City’s Administrative Code (§27-2004(a)(48)), are specific regulations, nearly all of them effective within the past year, regarding the having of buy-out conversations with tenants. In a list of activities explicitly set forth as not being exclusive, activities prohibited include:
(1) Reaching out to the tenant to make a buyout offer within six months after the tenant has informed the landlord in writing not to unless revoked in writing or a court orders otherwise; NYC Admin. Code §27-2004(a)(48)(f-1);
(2) Reaching out to the tenant to make a buyout offer without informing the tenant (at least every six months) (a) the reason for reaching out; (b) the tenant can turn the landlord down harmlessly; (c) the tenant can seek legal counsel and should go to a city maintained website; (d) that it is the landlord reaching out; (e) that the tenant has the rights outlined in (1) above; NYC Admin. Code §27-2004(a)(48)(f-2);
(3) Making the buyout offer while (a) threatening, intimidating, or using obscene language; (b) initiating communication at odd hours or in an (undefined) abusive or harassing manner; (c) initiating communication at the tenant’s job without prior written consent; (d) lying; NYC Admin. Code §27-2004(a)(48)(f-3); and
(4) Repeatedly contacting the tenant on weekends, holidays, outside normal banking hours unless the tenant previously approved outside-work-hour contact in writing, or in an (undefined) abusive or harassing manner. NYC Admin. Code §27-2004(a)(48)(f-4).
Particularly noteworthy is the last paragraph of these requirements in which a landlord is mandated to limit its contacts with the tenant for buyout purposes to those times when the tenant is least likely to be at the apartment.
While some of these behaviors are clearly “harassment” in any dictionary understanding of the term, some of these are more in the nature of strict liability. Take for example, the requirement that a landlord not initiate a buyout conversation with a tenant for 180 days after the tenant has advised in writing not to. In the dictionary understanding of harassment, there is no actual difference between contacting the client on day 179 or day 181. But, although there is, as yet, no appellate case law construing these provisions, it can be assumed that the deadlines will see strict enforcement, including such things as 180 days, prohibited initiated contact during the ordinary business day, and lying, where the regulation prohibits “knowingly falsifying or misrepresenting any information.”
Since it is “falsifying or misrepresenting,” courts, under the doctrine that every word must be accorded a meaning, Centennial Restorations Co. v. Wyatt, 248 A.D.2d 193, 669 N.Y.S.2d 585 (1st Dept. 1998) will likely find a distinction between “falsifying” and “misrepresenting.” Perhaps that distinction will be between those things that are demonstrably false—falsifying—and those things that are merely speculative or impossible for the landlord to know if true—misrepresenting. Perhaps, instead, the distinction can be drawn at falsifying being the creation of a forgery and misrepresenting being lying about a situation.
The rules described in this article apply exclusively to the entire city of New York. They are not part of the suburban counties that enforce the Emergency Tenant Protection Act of 1974 or the other statewide counties that have rent control. However, under the city’s Local Law 1 of 2018 (LL1) the fact that these rules are part of the definition of “harassment,” carries significance both in rent regulated housing where there are special penalties for harassment and in seeking and receiving building permits which throughout the city requires non-harassment in Single Room Occupancy (SRO) buildings and under LL1 in certain specified neighborhoods of the city, any targeted residential multiple dwelling, regardless of whether it is an SRO.
The rules for buying out tenants are the same throughout New York City, but LL1 targets specific buildings within specific neighborhoods for stiffening the penalties for violating those rules.
LL1 states “The purpose of this local law is to provide for the implementation of such a program as a geographically targeted and time-limited pilot program to allow an evaluation of the program’s accuracy and efficacy in targeting and addressing harassment in particular buildings.”
LL1, effective Sept. 27, 2018, occupies some 6,000 new words of the Administrative Code at §27-2093.1. Under it for Bronx Community Districts 4, 5 and 7; Brooklyn Community Districts 3, 4, 5, and 16; Manhattan Community Districts 9, 11, and 12; and Queens District 14 all buildings and selected buildings throughout the City, neither construction nor the issuance of certificates of occupancy can take place until certain further procedures are in place. The lack of a certificate of occupancy in a residential building means the landlord cannot sue for rent. MDL §302.
These further procedures entail employing the now familiar “Certificate of No Harassment” (CONH) procedure, previously applicable only to SRO buildings and described at length in Bailey and Treiman, Understanding Single Room Occupancy Laws, NYLJ Feb. 10, 2016. Under LL1, a finding of “harassment” will deny the CONH and potentially prevent a building from getting building permits, a certificate of occupancy, and collecting rent.
Thus, aside from the fines, penalties, and litigation entailed in a finding of harassment, if a building is inside this pilot project, a single finding of harassment by breaking the rules with regard to buyouts can result in a building’s complete loss of its income stream.
However, the DOB will issue building permits in targeted buildings if the landlord “cures” the harassment. However, the “cure” is not a cure at all. It is instead a coerced entry into a more restrictive form of regulation. Under the Administrative Code provision, the landlord must enter and record an agreement to provide within the community district housing square footage devoted to low income housing of at least 25 percent of the target building’s square footage. The rents for such unit are set at maxima described in NYCRR HPD Rules §53-12.
The expenses associated with constructing such housing may not, under the program, receive 421-a benefits, but it is clear that the low income housing provided under this program is intended to be like that of 421-a. There is no provision in the anti-harassment statute for what happens if there is nowhere available where such construction could take place.
However, since, under the pilot program, a building may pass in and out of being targeted for these provisions, lenders may become reticent about lending in these designated community districts or may require affidavits of no harassment from the tenants as a prerequisite to closing on a loan at the time of sale of the building.
As to harassment, regardless of whether it takes place where the pilot program is in effect, Administrative Code §27-2115 imposes fines for harassment at a minimum of $2,000 and a maximum of $10,000. If the court finds there was any harassment under these Administrative Code provisions, it is compelled to impose the $2,000 minimum, without the discretion to waive it completely. ABJ Milano LLC v. Howell, 61 Misc.3d 1037 (Civ. Ct. NY Cty. 2018). Since harassment under these provisions is a violation of the New York City Housing Maintenance Code, Civil Court Act §110(a) empowers the New York City Civil Court to enjoin further violations of these provisions.
With Whom To Negotiate
In Hui Zhen Wei v. 259 E. Broadway Assoc. LLC, 57 Misc. 3d 136, the Appellate Term for the First Department upheld the claim of the wife of the tenant of record in a lockout proceeding brought under RPAPL §713(10). The landlord had, upon the surrender of the apartment to the landlord, simply changed the locks to the apartment without any court proceeding. According to the court, without stating any other facts, “the hearing evidence showed that petitioner’s husband, the sole record tenant, formally agreed to surrender the apartment in exchange for compensation, petitioner was not a party to the agreement, and was in China visiting her family when the agreement was executed and possession surrendered.”
The court held that the lockout of the non-tenant wife was improper because “owner was previously advised by [the wife] that she was asserting possessory rights and that respondent, in fact, made several buyout offers directly to [her], the most recent such offer [having been] made only the month before she left on her trip.”
Thus, like the lease, the husband and not the wife was a party to the surrender agreement. Had the landlord actually brought a summary proceeding, it could have been brought successfully against only the husband without naming the wife. Immediate family members living with the tenant of record by virtue of their family relationships are not necessary parties to summary proceedings. Flak v. Kaye, , Dec. 9, 1991, 28:2, 19 HCR 718B (App.T 1st Dept. 1991). Yet, under Hui Zhen Wei they are necessary parties to surrender agreements. Absent their participation in the agreement, the landlord cannot count upon reliably cutting off any claim they may have to possession.
Under Hui Zhen Wei this class of persons whom the landlord will need to join the agreement includes all persons who could claim succession to the apartment. Under rent regulation, even minors can validly assert (or have asserted on their behalf) valid succession claims, Doubledown Realty Corp. v. Harris, 13 HCR 83A, 128 Misc2d 403, 494 NYS2d 601, NYLJ, April 4, 1985, 5:4 (AT1 1985). Thus, even minors have to be added to these agreements and that could conceivably entail the need for an infant’s compromise proceeding for a court to approve the agreement (CPLR 1207, 1208).
Further, these authors’ experience teach them that offers of payment to persons with dubious claims do not necessarily mean that their claims are actually taken seriously and the industry often uses small buyoffs of dubious tenancy claims. However, under Hui Zhen Wei, one makes such trivial offers only at one’s peril.
For the past several years, landlords and tenants have had a shared interest in having the landlord buy the tenant out of the value the tenant is sitting on in the apartment. Navigating the highly restrictive new landmines and curtailments on these negotiations will not only affect the actual agreements but treatment by lenders, government agencies and officials. Practitioners and their clients must tread carefully.
Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. Dov Treiman is a partner at the firm.
1. This theory is almost completely swallowed by its exceptions.
2. The implementing rules appear at Chapter 53 of the Rules of the Department of Housing Preservation and Development.