Scott E. Mollen

Commercial Landlord Tenant—“Good Guy Guarantee”—Since Tenant Was in Default at the Time it Vacated the Premises, the Guarantee Remained in Effect

This decision involved a commercial lease. Defendants included guarantors under a “good guy guarantee” (guarantors). Generally, a “good guy guarantee provides that the guarantor will be released from the guarantee if the tenant surrenders possession and is not in default of its obligations at the time of surrender.

The tenant had failed to pay rent and additional rent in August 2017. The landlord had commenced an eviction proceeding that resulted in a stipulation of settlement (stipulation). The stipulation provided that the tenant would vacate the premises on or before Oct. 31, 2017. The tenant vacated on Nov. 3, 2017.

The landlord asserted that the tenant remained liable for rent and additional rent due under the lease, less payments received as a result of a temporary license of the premises to a “pop-up” tenant from Nov. 29, 2017 to Feb. 28, 2018. The landlord had notified the tenant that it was granting a license for the space for the tenant's benefit. Since the tenant owed rent at the time when it vacated the premises, the landlord asserted that the guarantors remained liable for rent and additional rent under the guarantee.

The landlord had moved for partial summary judgment for unpaid rent and attorney fees. The defendants cross-moved for summary judgment to dismiss the complaint in its entirety. They argued that the landlord had accepted the tenant's surrender of the premises and the lease had been terminated. Alternatively, the guarantors asserted the plaintiff “engaged in actions sufficient to establish a termination by operation of law, by accepting the keys and re-letting the premises, and that since (tenant) has no further obligations to plaintiff, the guarantors…have no liability.” The tenant further argued that it complied with the terms of the guarantee by surrendering the premises.

The New York Court of Appeals has explained that when a tenant abandons the premises prior to the expiration of a lease, a landlord has three options: “(1) it could do nothing and collect the full rent due under the lease, (2) it could accept the tenant's surrender, reenter the premises and relet them for its own account thereby releasing the tenant for further liability for rent, or (3) it could notify the tenant that it was entering and reletting the premises for the tenant's benefit.” If a landlord re-lets the premises for the tenant's benefit, “the rent collected would be apportioned first to repay the landlord's expenses in reentering and reletting and then pay the tenant's rent obligation.” Further, “[o]nce the tenant abandoned the premises prior to the expiration of the lease,…, the landlord was within its rights under New York law to do nothing and collect the full rent due under the lease.”

The stipulation “severed all monetary claims without prejudice to all defenses, to be asserted in a plenary action.” Thus, the court held that “vacating the premises pursuant to the [stipulation] did not terminate [tenant's] obligations under the lease….” Moreover, the lease provided for recovery of rent, as liquidated damages, “in such circumstances….” and a landlord of a commercial property does not have a duty to mitigate damages.

The lease did not have an acceleration clause. Therefore, the court held that the landlord's application for partial summary judgment through March 31, 2018 was appropriate. Since the lease authorized the landlord to re-enter the premises upon the tenant's default and specified that the tenant's liability would survive re-entry, the landlord properly credited the rent received from the temporary license to the tenants.

The court then explained that although the “good guy” guarantee limited the guarantors' liability “to the period prior to the tenant's vacating and surrendering the premises…by its terms, the guarantee was limited in this way only if the tenant paid all outstanding obligations when it vacated and if the surrender was accepted by the landlord.”

The court found that “since the rent and additional rent was due at the time the defendant vacated, the guarantee remains in effect….” The court also held the defendants' affirmative defenses lacked merit and the landlord was entitled to reasonable attorney fees, pursuant to the prevailing party's provision embodied in its lease.

525 Delaware LLC v. Krush Inc., Sup. Ct., Kings Co., Index No. 502590/18, decided July 23, 2018, Silber, J.

Landlord Tenant—Rent Stabilization—Airbnb—If Overcharges Amounted to Profiteering, There is No Right to Cure—Issues of Fact Precluded Summary Judgment

A landlord commenced a holdover proceeding against two rent stabilized tenants on the ground that they “incurably breached a substantial obligation of (the) tenancy by renting the subject premises” (apartment) out as if the [apartment] was a hotel room.” After the tenants answered, the landlord moved for summary judgment. The landlord had not served a Notice to Cure. The court addressed, inter alia, whether a Notice to Cure was required under the subject circumstances.

The court explained that “[r]ent-regulated tenants who rent out their apartments to transient individuals at rates higher than allowed by applicable regulations are engaged in conduct in the nature of subletting rather than taking in roommates, and engaged in conduct in the nature of profiteering, which is an incurable violation, for which no notice to cure is required.”

Courts may determine whether a rent-regulated tenant “has profiteered by totaling the income the tenant generated from subletting and comparing that sum with the aggregate of the tenant's daily rent for the same number of days that the tenant sublet.” Rent stabilized tenants who overcharge subtenants are “not subject to eviction where [their] conduct does not rise to the level of profiteering….” In the subject case, the tenants had collected sublet income of $28,992. The aggregate amount of rent that the tenants paid during the subject time period was $38,232.15. Thus, the tenants collected less sublet income than the amount of rent that they had paid during the subject period. The sublet income came to approximately 76 percent of the tenants' rent liability.

The court noted that there was “[n]o discernable apposite authority” that found that a tenant “who collected less sublet income than her rent liability profiteered to the point of precluding a cure.”

The landlord had argued that because the tenants earned 76 percent of their rent obligation from the subtenants, no cure should be permitted as a matter of law. The landlord cited a prior case wherein a tenant characterized her guests as “roommates” and asserted that “rent-stabilized tenants may only charge roommates their proportion share of the legal regulated rent….” The tenants argued that they resided in the premises “contemporaneously with all of the occupants at the [apartment], which would include the two longer-term occupants….”

The tenants countered that they had “refunded at least a portion of the aggregate overcharge to a number of (their) prior subtenants, a factual distinction between this proceeding and the authority depriving like tenants of an opportunity to cure.” The tenants had refunded $4,701 to various subtenants, which reduced the aggregate overcharge from $9,875.92 to $5,174.92.

The court noted that at least five people had stayed at the apartment for at least 30 days each. The tenants had not shown that they had offered refunds to those five people. However, the court explained that an occupancy for less than 30 days is “considered 'transient'… It is the sublet of a rent-regulated apartment to 'transient' individuals that constitutes an incurable violation.” The court assumed for purposes of the motions that three of the five occupants were “transient.” The court drew an “inference” that the “two longer-term occupants were not 'transient'” and noted that if the rent paid by the two longer term occupancies was not counted, there would have been no “overcharge.”

The court found that the tenants raised an issue of material fact as to whether the occupants were subtenants or roommates. The court also explained that if the two longer-term occupants were roommates, the landlord would not have a claim to evict the tenants even if they charged them more money than their proportion share of the rent.

Thus, the court held that there was an issue of fact as to whether the amount of overcharges bars or precludes a motion to summary judgment “on the proposition that a tenant who has rented out her apartment on a short-term basis has no opportunity to cure.” Here, the tenants had collected less subtenant rent than their rent liability and the tenants had raised an issue of fact as to whether they had already refunded amounts to the subtenants that constituted overcharges. Since there was an issue of fact as to whether the occupancies of the other individuals were transient for the purposes of denying the tenants an opportunity to cure, the court denied the landlord's motion for summary judgment.

Additionally, the court found that the landlord had proven its prima facie case, including that the tenants had rented out the apartment on Airbnb and awarded the landlord partial summary judgment to that effect. However, the court held that the landlord had not proven that the tenants are not entitled to an opportunity to cure, which remains an issue for trial.

498 W. End Ave. LLC v. Reynolds, Civ. Ct., N.Y. Co., Index No. 70878/2016, decided July 23, 2018, Stoller, J.

Landlord-Tenant—Court Grants Petition For Article 7-A Administrator—Building Conditions Were Dangerous to Tenants—Court Rejects Argument That One-Third of Tenants Were Required to Testify at Trial

Nineteen tenants of the subject apartment building (building) commenced a proceeding, seeking the appointment of an Article 7-A Administrator pursuant to the Real Property Actions and Proceedings Law (RPAPL). The building included 36 Class “A” residential apartments. The 19 petitioners were entitled to occupy 15 of the occupied apartments. They constituted at least one-third of the building's tenants in the building. In October 2017, the NYC Dep't of Housing Preservation and Development (HPD) had commenced “a 'Housing Part' proceeding,” seeking to correct numerous violations of the Housing Maintenance Code (HMC). That matter was settled by a consent order, pursuant to which the landlords had to correct 17 Class “C” (“immediately hazardous”) violations, 42 Class “B” (“hazardous”) violations and 13 Class “A” violations.

The court explained:

RPAPL Article 7-A was enacted…to permit one-third or more of a building's tenants or HPD to institute a proceeding for the appointment of an administrator to operate a building when conditions dangerous to the life, health or safety of the occupants exist. …An Article 7-A proceeding may be maintained where there is a “lack of heat or of running water or of light or of electricity or of adequate sewage disposal facilities, or any other condition dangerous to life, health or safety, which has existed for five days, or an infestation by rodents, or any combination of such conditions; or course of conduct by the owner or his agents of harassment, illegal eviction, continued deprivation of services or other acts dangerous to life, health and safety”. …

A finding that such conditions exist requires the appointment of an Article 7-A administrator. …However, if the landlord can establish that such conditions do not exist or have been removed or remedied, this constitutes a statutory defense to the appointment of an administrator….

Where tenants cannot demonstrate “the existence of emergency situations, unusual circumstances, or neglect by the landlord, the court may dismiss the petition.” The appointment of a 7-A administrator has been deemed to be a “drastic remedy.” If the petitioners cannot demonstrate that they comprise “one-third or more of the tenants actually occupying the building, the proceeding will be dismissed.”

The court granted the petition based on the testimony of numerous tenants that occupants of the building were still “only sporadically receiving essential services” and “despite the landlord's attempt to do some work in the building, there are remaining conditions that are dangerous to the life, health, and safety of the occupants of the building.”

The court rejected the landlord's argument that a 7-A administrator may only be appointed where one-third or more of the tenants “actually testified at trial.” The court found that there was “no statutory mandate or any controlling case law precedent” that supported such argument.

The court concluded that “the actions and inactions of [the landlord] and his agents demonstrate an inability to fully comply with the [HMC] and other requirements of law.” The court further noted that the tenants had “engaged in a lengthy and frustrating struggle to compel the necessary and proper maintenance of the building, and that HPD's placement of the building in the Alternative Enforcement Program (AEP) is indicative of the need for the appointment of a 7-A administrator.”

The court emphasized that although the 7-A administrator is a “drastic” step, the building conditions “which include unsafe, ungrounded electrical wiring, lead paint, and a rodent infestation, are sufficiently grave and serious to warrant the appointment of a 7-A administrator.” The court emphasized that the existing conditions are “dangerous to the life, health, and safety of the tenants” and there was “a periodic lack of essential services.” Accordingly, the court directed the HPD to submit a proposed order of the appointment of a 7-A Administrator to be selected by the court.

Matter of Garcia, Civ. Ct., Bx Co., Case No. LT-58271-18, decided July 24, 2018, Marin, J.

 Scott E. Mollen is a partner at Herrick, Feinstein.