New Rules for Seeking Buyouts of Rent-Regulated Tenants
By Adam Leitman Bailey
Due to 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. (See 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 holds that where the landlord has acted seriously coercively, the courts will not even direct return of the funds [180 Misc.2d 686, 689, 694 N.Y.S.2d 837 (App. T. 2d Dept. 1999)].
Landlords’ 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.
With Whom to Negotiate
In Hui Zhen Wei v. 259 E. Broadway Assoc. LLC 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) [57 Misc. 3d 136]. 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, experience has taught 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.