Scott E. Mollen

Developer's Claims Against the City of Buffalo Based on RICO, Violation of the Equal Protection Clause, Breach of Contract and Promissory Estoppel Dismissed—Developer had Allegedly Refused to Hire Political Ally of the Mayor

A developer had made “preliminary arrangements from 2007 through 2009 with the city of Buffalo to build affordable housing on city owned land and to finance the project in part with public funds.” The project allegedly “died,” because the developer “refused to hire a political ally of the mayor.” The developer sued the city, the city's Urban Renewal Agency, the mayor, and other city officials. A U.S. District Court had dismissed all of the developer's claims, either based on Federal Rules of Civil Procedure 12(b)(6) and 12(c) or by summary judgment. The developer appealed. The U.S. Court of Appeals for the Second Circuit (court) affirmed.

The court held that the developers “civil RICO claim against the city officials is barred by common law legislative immunity because the mayor's refusal to take the final steps needed to approve the project was discretionary legislative conduct, and (developer's) prima facie case would require a factfinder to inquire into the motives behind that protected conduct.” The court further held that the developer's “class of one” equal protection claim “was properly dismissed because (developer) failed to allege in sufficient detail the similarities between (developer's) proposed development and other projects that previously received the city's approval.”

The developer's breach of contract claim was also dismissed. That claim was predicated upon the city's “commitment letter” which had not created a “binding preliminary contract in conformity with the…city charter's requirements for municipal contracting.” The court also affirmed the dismissal of the developer's claim based on promissory estoppel. The court explained that promissory estoppel “is unavailable against municipal entities except in rare cases of 'manifest injustice.'” The court found that the developer's claims failed “to meet this demanding standard.”

The court explained that as the “planning phase drew to a close,” the developer had “felt pressure from the city to hire an organization sponsored by a political ally of (the mayor) as a contractor on the project.” After the developer hired a different contractor based upon what it viewed as a more “attractive proposal at lower cost,” the city “failed to take the steps necessary to approve the project, and the whole undertaking died on the vine.”

Although the developer's claims were dismissed, the court observed that the developer's allegations that its project fell apart at the “eleventh hour because city officials prioritized cronyism over civic responsibility,” were “serious allegations” and the developer had “come forward with substantial evidence of their accuracy.” However, the court concluded that the evidence was insufficient to “overcome the significant legal flaws in (developer's) claims for damages.”

Comment: As this decision illustrates, promissory estoppel claims are very difficult to establish against a municipality. They are sometimes asserted by a plaintiff who has invested substantial time and money in pursuit of a deal or project with a city or other public entity and the proposed transaction never reached the legally mandated formal approval stage. Such plaintiffs often cite informal letters or oral communications which encourage the plaintiffs and may indicate that a plaintiff's proposal will be approved. Absent unusual circumstances, encouragement and oral assurances do not equal a legally enforceable approval.

Most people seeking to do business with government understand that until they obtain a formal approval, their investment of time, effort and monies are at risk. This is one reason why many businesses elect to not participate in a request for proposals (RFP) or bidding process that could be lengthy and expensive. However, when the real estate market weakens and there is little private sector work, some developers will “adapt” by pursuing public projects. If they cannot build luxury residential housing or office buildings, they may seek to build schools or other public facilities.

NRP Holdings LLC v. City of Buffalo, U.S. Court of Appeals, 2nd Cir., Case No. 17-783-cv, decided Feb. 20, 2019, opinion by Carney, J. Sack and Parker, JJ. concur.

Commercial Landlord-Tenant Allegedly Used Apartment for Karate School in Violation of Zoning Law—Unauthorized Alterations—Home Occupation Exception Inapplicable—Landlord Waived Objection to Operation of the School—No Waiver as to Unauthorized Alterations

A landlord commenced a proceeding against a tenant, alleging that the tenant breached a substantial obligation of its tenancy. The landlord contended that the tenant had made illegal alterations of the premises and used the premises for a karate school (school) in violation of the New York City Zoning Resolution (ZR). The tenant asserted that the landlord knew about the alterations, had waived any objection to the alterations, and had interfered with the tenant's ability to cure.

Following a trial, the court found that the premises is subject to the rent stabilization law and the tenant had been using the premises as a school since the mid-1970's. The court noted that determining whether the school was legal “entails a somewhat labyrinthine odyssey through various aspects of land-use law.”

ZR 32-31 “prohibits the operation of a physical cultural establishment in the zone in which the …premises is located without a variance from the” NYC Board of Standards and Appeals. ZR 12-10 defined “physical cultural establishment” as including “any establishment to provide instruction in physical exercise, including martial arts….”

The school had existed prior to the amendment of the ZR which required physical cultural establishments to have a permit. The ZR amendment did not “per se prohibit continued use of the …school,” since the school was a nonconforming use. However, since “nonconforming uses are detrimental to zoning schemes,” “public policy favors their eventual elimination.” Thus, “the protection of vested rights in a nonconforming structure does not extend to subsequent construction….” Here, the certificate of occupancy (CO) provided that the premises would be used for “residential purposes.” The court held that since the CO barred commercial use of the premises for a school, “the operation of the …school is illegal….”

The tenant had also argued that use of the school is “permissible as a 'home occupation'.” A tenant expert witness testified that a home occupation need not be mentioned in a C of O. ZR 12-10 defines a “home occupation” as “an accessory use which is incidental to or secondary to the residential use of a dwelling unit and, if teaching is involved, may be taught to not more than four pupils at a time.” The tenant neither pled that the school was a “home occupation,” nor introduced evidence as to the percentage of the floor area that was devoted to the school.

Moreover, photographs indicated that the school had more than four students. Since a “home occupation” is “an exemption from zoning norms,” such exemption is to be narrowly construed. The court further noted that the “legislative thrust of the exemption conveys a goal of protecting artistic and professional uses, but not general commercial uses.” The court concluded that the school was not a “professional” use and was not a “home occupation.”

The court rejected the tenant's defense of waiver. The court cited the tenant's operation of the school for more than 40 years prior to the commencement of the proceeding and the fact that this proceeding had been commenced more than 20 years after the issuance of a residential CO. The court opined that such facts belie “the proposition that the operation of the …school actually aggrieved (landlord) in any way.”

The landlord argued that the waiver defense is inapplicable and a default in a tenancy can “bar a waiver defense when it is serious enough as to implement public policy.” The court acknowledged that “the operation of a commercial business in a residential premises can potentially preclude a waiver defense….” However, the court noted that such operation of a commercial business “does not do so as a matter of law, particularly in the absence of a violation of health and safety standards or injury to the building.”

The court agreed that one can “theorize about the adverse effects of a karate school on the Building, such as noise or foot traffic….” However, the record lacked evidence of “any implications of the …school that bear on 'health and safety standards'.” The premises is located in a C6 District which is a “General Central Commercial District.” That district is intended to “provide for a wide range of retail, office, amusement service, custom manufacturing and related uses normally found in central business district and regional commercial centers.” Thus, the court held that the landlord had waived its objection to the operation of the school.

However, the court found that the tenant had made alterations without the landlord's written permission, including electrical work and construction of partitions. The tenant argued that the landlord had also waived an objection to the alterations. However, apart from a factual dispute as to a waiver, the alterations “implicate two critical concerns of building regulation in New York, i.e., light and air…and that electrical work be done safely.” The court noted that the electrical panel and subpanel were “improper and a fire hazard.”

The court acknowledged that a landlord “can waive an objection to an alteration in violation of the lease when a landlord did not respond to a tenant's repeated complaints and demands to repair conditions….” Although evidence showed violations involving electrical outlets from the 1990's, those problems were remedied by 2008.

The tenant further argued that the alterations had been known for seven years before commencement of the subject proceeding. However, the lease required written consent for alterations and there was an “ambiguity in record as to the extent of the prior owner's or the member's knowledge of the alterations.” The court found that the tenant did not provide “reliable evidence” of “permission or consent” or that the landlord had waived its objections. Accordingly, the court rejected the waiver defense as to the alterations and held that the landlord is entitled to a “final judgment of possession” on that ground.

A tenant may not be entitled to cure where an alteration causes “lasting or permanent injury” to an apartment, such as where a tenant “guts the bathroom by removing and replacing all walls, flooring, lighting and fixtures without first conducting an asbestos test before removing the walls or insuring the new sheet rock had the proper fire rating.”

Here, the alterations involved “the construction of non-load-bearing partition walls and electrical work, neither of which rises to the level of gutting a bathroom.” Prior case law held that tenants were permitted to cure improper alterations involving a “balcony enclosure, enlarging a bedroom, and removing a door and an outdoor window without proper approvals and permits…and by unlicensed and uninsured contractors,” as well as “removal of a sink, a medicine cabinet, and a toilet.”

The court explained that the “opportunity to cure…afforded tenants is consistent with the proposition that the benefits of RPAPL § 753(4) to tenants are to be spread as widely as possible.” The court concluded that the “partition walls and the electrical work…did not deprive a (tenant) of an opportunity to cure.” Accordingly, the court dismissed the landlord's claims that sought a judgment based on “commercial use” of the premises, without prejudice to a claim “sounding in nuisance if such a case would have any merit.”

The court awarded the landlord a final judgment possession against the tenant only for the tenant's “breach of the lease requiring consent for alterations.” The court's stayed issuance of a Warrant of Eviction for a period of time in order to permit the tenant “to cure the breach by legally removing the partition walls and engaging in the necessary legal work to restore the panel and sub-panel to their original condition.” The court warned that “[o]n breach, the warrant may issue.” The court further ordered the landlord, pursuant to New York City Civil Court Act §110(c), to “sign off on any documents” that the tenant needs to obtain “permits necessary to cure….”

Comment: The alleged illegal use had continued for approximately 40 years. In a weak real estate market, landlords often overlook illegal use and other lease violations, such as improper alterations, in order to make sure that their properties remain occupied and generate income. When real estate markets become strong, some landlords may “suddenly discover” and become “concerned” about lease violations and attempt to use such violations to terminate a lease and re-let their property at a significantly higher rent.

Sam & Joseph Sasson LLC v. Guy, Civil Court, New York Co., Case No. 77516/2016, decided Dec. 14, 2018, Stoller, J.

Landlord Tenant—$10,000 Property Damage Claim Cannot be Maintained in Summary Nonpayment Proceeding in Housing Court

A landlord commenced a nonpayment proceeding against a rent-stabilized tenant. The landlord sought a possessory judgment, a money judgment for rent arrears and $10,000 as “[a]dditional rent due to damages caused by tenant pursuant to paragraph 13 of [his] lease agreement.” The tenant had allegedly caused a fire in the apartment which resulted in damages of $10,000. Paragraph 13 of the lease provided “Renter will reimburse Owner all costs and expenses occurred by Owner to remedy damages to the apartment …caused by Renter…. Such sums shall be added rent.”

The tenant moved for partial summary judgment, seeking an order severing the landlord's claim for the $10,000 “additional rent.” The tenant argued that “additional rent” may not be “sought as part of [a] possessory judgment against a rent-stabilized tenant.”

The landlord argued that although it cannot obtain a possessory judgment on its claim for “additional rent,” it “should be permitted to seek a non-possessory judgment for damages caused by Respondent provided its claim for such damages arises out of the same transaction or occurrence that gives rise to their claim for a possessory judgment for the alleged rent arrears.”

The court rejected the tenant's argument that a landlord may never seek “additional rent” from a rent-stabilized tenant in a summary non-payment eviction proceeding. The court explained that the “type of 'additional rent' claimed by petitioner …is not appropriate for litigation in Housing Court. Property damage claims such as those sought by petitioner, traditionally within the scope of tort liability, is outside the scope of Housing Court proceeding.”

The landlord argued that its property damage claim could be heard in the Housing Court based on “revisions to the Civil Practice Act in 1949, allowing permissive joinder of parties and cause of action….” The court explained that such argument “ignores the limited scope of Housing Court proceedings” and that the landlord's “utilization of a Lease that labels property damages claims as 'additional rent' does not transform petitioner's claim to one that is properly adjudicated in Housing Court.” Accordingly, the court granted the tenant's motion and severed the $10,000 property damage claim, without prejudice to the landlord seeking such damages in a proper forum.

Vale Partners LLC v. Partlow, Civil Court, Bronx Co., Case No. 58966/18, decided Dec. 2, 2018, Baum, J.

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