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Adam Leitman Bailey, P.C. Innovative Lawyering on Whether Rent Regulated Leases Could Be in Corporate Name Leads to Multimillion Dollar Buyouts

By Adam Leitman Bailey


I. Due Diligence

After ALBPC’s client, the owner and landlord of a posh 35-story white-glove cooperative building on Central Park South, approached another law firm to evaluate the propriety of two rent stabilized leases in its building without any success, it turned to ALBPC for answers.

Upon completing its due diligence, ALBPC found that the individual tenant, who had since passed away, had entered into two rent stabilized leases with the client’s predecessor-in-interest for the subject units, two large adjacent luxury apartments overlooking central park.  In addition, ALBPC discovered that prior to his death, the tenant assigned both stabilized leases to closely held corporations that had had an interest in which ALBPC discovered were mere shell companies.  Within the course of its review of records obtained from the Department of Buildings, ALBPC also found that the tenant subsequently had the two rent stabilized units combined with another adjacent apartment that he owned on the same floor, creating a posh Central Park residence.

 II. Issue

Although there was no existing case law squarely dealing with this issue – whether a rent stabilized lease could be declared invalid where an individual not contractually designated by the corporate stabilized tenant resides in the unit as her primary residence – ALBPC used creative lawyering in obtaining a declaration from the Court that tenant’s leases were not subject to New York City’s Rent Stabilization Code.

III. Law

Under New York law, an individual must be contractually designated by the corporate stabilized tenant  corporation where that individual resides in the unit in question as her/her primary residence.  ALBPC argued that the underlying leases and the assignments  clearly did not designate the individual tenant that was presently residing in the units and therefore ALBPC’s client was entitled to a Court order declaring that the leases were not subject to rent stabilization.  ALBPC further argued that a defunct corporate entity cannot be a tenant to a rent stabilized lease because the statutory benefits afforded under the Rent Stabilization Code are strictly intended for individuals with lesser means, and not single purposes entities that are no longer in business.

IV. The Litigation

ALBPC, on behalf of the client, brought suit against the tenant corporate entities, along with the prior tenant’s wife, who was residing in the units, seeking a declaratory judgment declaring that the premises should not be subject to rent stabilization.  Once the client obtained such a declaration from the court, the client would then be in a position to garner the fair market value for the luxury units, an amount that would be exponentially higher than the rent stabilized rent.

Initially, the tenant, who was running scared, tried to delay the adjudication of the matter by initiating a separate guardianship proceeding in Supreme Court to have an Article 81 Guardian appointed for the prior tenant’s wife, who allegedly could no longer administer her own affairs.  ALBPC successfully diverted this holdup tactic by bringing a motion to force the tenant to pay all outstanding use and occupancy forthwith, together with future use and occupancy for the units during the pendency of the litigation.  ALBPC further argued that because the subject units were never actually subject to rent stabilization, the defendants should at once be required to pay the substantial back rent, representing the difference between the stabilized rent and fair market rent for the units from the inception of the rent stabilized leases.

In granting the client’s motion the Court agreed with all of ALBPC’s arguments, and most importantly, at ALBPC’s behest, specifically directed the defendant tenant entities to whom the rent stabilized leases were purportedly assigned, to pay the use and occupancy.  By virtue of this order, the corporate tenant entities were deemed to be the lessees of the underlying rent stabilized leases which never authorized the occupation of the unit to the current tenant, thereby essentially guaranteeing the ultimate success of the client’s declaratory judgment action on the merits.  Backed into a corner, the defendants were forced to take an appeal from the Court’s decision.

V. Conclusion

Due to the significant pressure exerted upon the tenant, who was now ordered to pay substantial sums in use and occupancy, while simultaneously fighting an appeal, the tenant was caught between a rock and hard place.  With nowhere to turn, the tenant immediately opened settlement discussions with ALBPC’s client to purchase the subject units at issue.

After having gained considerable leverage for the client, ALBPC swiftly negotiated a multimillion dollar sale for both units and drew up the requisite closing documents to consummate the sale.  Moreover, as one of the conditions of the settlement, ALBPC compelled the tenant to consent to a judgment stating that the units were not subject to rent stabilization, which now makes it much easier for ALBPC’s client going forward, as it is not constrained by the plethora of filings and other requirements for rent stabilized apartments.

ALBPC attorneys Adam Leitman Bailey, Jeffrey R. Metz and Massimo F. D’Angelo litigated the matter on behalf of the client, and Dov Treiman and Leonard Ritz handled the transactional side of the deal.

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Adam Leitman Bailey, P.C.

NEW YORK REAL ESTATE ATTORNEYS