Scott E. Mollen

Commercial Landlord-Tenant—Landlord Awarded Legal Fees and Sanctions Based on Tenant's Delay Tactics With Respect To Surrendering the Premises—Litigation Involved More Than Seven City, State and Federal Judges—"Landlord and Tenant Law is Technical and Complex, and Requires a High Level of Skill"

A landlord commenced a commercial summary holdover proceeding by service of a 30-day termination notice (notice) seeking to recover possession of the subject premises. The month-to-month tenancy was terminated effective Oct. 31, 2017. After the tenant, a private school, failed to voluntarily vacate the premises, the landlord served a notice of petition and petition. The tenant had moved to dismiss the petition.

The motion to dismiss had been denied. The tenant had claimed that there were defects in the pleading and the affidavit of service. A court previously found that service had been proper and any alleged defects in the affidavit of service were "insignificant." That court directed the tenant to serve an answer to the petition. The tenant filed a notice of appeal to the Appellate Term. However, the tenant failed to serve an answer. The landlord had moved for a default judgment. The tenant had cross moved for permission to file a late answer and demanded a traverse hearing.

In the course of a court conference, the parties reached a settlement. The tenant consented to a final judgment of possession, with a warrant of eviction to issue forthwith. Execution was to be stayed until June 30, 2018 for part of the premises and July 20, 2018 for another part of the premises. The tenant agreed to pay $3,500 in use and occupancy for the months of April, May, June and July 2018 and to discontinue, without prejudice, a Civil Court action it had commenced against the landlord. Each party reserved their rights and defenses to all claims, except those that were waived in the agreement.

Thereafter, the tenant failed to timely vacate the premises. The tenant then commenced an action in the Federal Bankruptcy Court, seeking to stay the subject proceeding. The landlord moved in the bankruptcy court to vacate to automatic bankruptcy stay. A bankruptcy judge allowed the landlord to pursue its rights with respect to the premises.

A marshall's notice of eviction was then served on the tenant. The tenant moved to stay the execution of the warrant so that the tenant and its students could vacate "the subject premises with dignity." The tenant argued that it used the premises as a "Jewish educational institution" and it contained "at least 50 children." After unsuccessful negotiations as to a possible purchase of the premises by the tenant, the tenant sought additional time to vacate the premises. The tenant represented that it had "secured new commercial space but required two additional weeks to move out to ensure that there was no disruption in the children's education."

The landlord had moved for sanctions against the tenant and the tenant's attorney and for an award of attorney fees and cost pursuant 22 NYCRR 130-1.1 (Part 130). The landlord alleged that the tenant's attorney failed to notify the landlord of an order to show cause (OTSC) prior to its submission before the Civil Court, had failed to provide a complete copy of the OTSC with exhibits and had engaged in conduct that "constitutes frivolous conduct as proscribed under the law."

The landlord claimed that the tenant had "used the judicial system to intentionally…delay…the surrender of possession of the…premises" by the agreed upon vacate dates. The landlord cited the tenant's "barrage of litigation," including "the…motion to dismiss on the grounds of improper service and process when the (tenant) had personal knowledge that service was…proper; an appeal of the court decision and order on its motion to dismiss, which was voluntarily withdrawn several months later;" a meritless action in the Civil Court; and a baseless petition for "Chapter 11 in the Bankruptcy Court to stay the execution of the warrant of eviction…."

The subject court (court) had found that the tenant had "exhausted the statutory stay of execution of the warrant pursuant to RPAPL §753(1). It also stated that the tenant had "acted in bad faith by using the judicial system…with no legal grounds to remain in possession of the…premises to the substantial detriment of the (landlord)." The tenant had "used motion practice including this (OTSC) to remain in possession for nearly one year after the commencement of this simple holdover proceeding."

The court noted that the equities "balance in favor of the (landlord) that has the…right to possession pursuant to the two-attorney stipulation and no facts (had) been presented to allow this court to exercise its discretion to stay the execution of the warrant of eviction." Thus, the court denied the tenant's motion, vacated all stays and authorized the landlord to proceed with the immediate eviction of the tenant. It had adjourned the landlord's motion for sanctions. The marshall awarded the landlord actual possession of the premises.

Thereafter, the tenant moved for permission to access the premises, claiming that it could not remove all of its property because of the observance of a Jewish holiday. The tenant allegedly sought to recover "school supplies and other materials required… to operate the new school." The tenant was allowed to remove its personal property. The tenant thereafter alleged that the landlord's attorney tried to circumvent the forgoing access order, its personal property had been combined with landlord's property, and it took more time than anticipated.

The court thereafter conducted a hearing with respect to sanctions and attorney's fees. The landlord submitted attorneys' affidavits, which set forth its attorneys' educations and professional experiences, hourly rates and the number of hours devoted to the subject proceedings. The landlord's law firm had billed the landlord for a total of $98,257.61. Additionally, the tenant owed approximately $180,000 in back rent.

The tenant complained that during the winter there had been a lack of heat and that caused a loss of enrollment of students and income. However, the tenant acknowledged that it had signed a stipulation of settlement which provided that the tenant would vacate the premises by certain dates. The tenant claimed that it thought a deal for alternate space to operate the school fell through and that led to the bankruptcy proceeding. The tenant also cited its difficulty in having its grievance heard by a Beis Din (a religious court). The tenant admitted that the bankruptcy filing was done to "prolong" the eviction process.

The court explained, inter alia, that "conduct is frivolous" and can be sanctioned under Part 130 if it is "completely without merit in law and cannot be supported by a reasonable argument for an extension, modification, or reversal of existing law" or it is "undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another." Case law held that "[m]aking claims of colorable merit can constitute frivolous conduct within the meaning of (Part 130) if 'undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another….'"

It was "irrefutable that the (tenant) wanted to purchase the property from the (landlord)…." From the beginning, the landlord had advised the tenant that the demised premises "did not contain a valid certificate of occupancy, contained violations and the (tenant) took the premises 'as is'." The lease obligated the tenant to maintain its own utilities, pay monthly rent and maintain certain insurance. The lease also stated "that any disputes between the parties had to be resolved by the Beis Din of Crown Heights."

The tenant failed, inter alia, to obtain a family daycare license for months, had not obtained required insurance, had incurred rent arrears and did not pay utility charges. Moreover, the parties had entered into an agreement pursuant to which the tenant acknowledged the debt, agreed to remedy its defaults and agreed that if the tenant failed to pay the rent, the tenant would "evacuate the premises without any hassle, and grievances, and without involving any outside intervention at all." The court held that the tenant failed to comply with the terms of that agreement and since the lease had expired, the landlord had properly commenced the underlying holdover proceeding. It also noted the tenant's "barrage of litigation", including a baseless motion to dismiss and appeal and a bankruptcy proceeding that was intended to delay the landlord's right to possession.

The court concluded that the tenant's conduct demonstrated its "unwillingness" to "comply with the…law and such conduct under these facts in this case constitutes frivolous conduct." It stated that there were no "legally justifiable grounds for the (tenant) to not comply with the agreements and no legal defenses proffered by the (tenant) in any of the papers for noncompliance with its financial obligation while in occupancy of the…premises."

The court also stated that the commencement of a Supreme Court action for arbitration, after the commencement of the holdover proceeding was "yet another example of such instance of frivolous conduct and in the opinion of this Court, this provision of the lease is also unenforceable since the (tenant) consented to a final judgment of possession with the issuance of a warrant of eviction that cancelled the landlord and tenant relationship and all tenancies thereunder including the written lease between the parties…." Thus, the court held that the arbitration provision was unenforceable. It also noted that it made "every effort to appeal to the sensibilities of (tenant's) agent" at multiple court conferences.

The court acknowledged that some of the tenant's actions were "legitimate and at least had slight colorable merit." However, "many others," e.g., the two appeals and bankruptcy filing "were so lacking in factual or legal merit that it demonstrates to the court the (tenant's) willful and malicious intention to use the courts not as a means of resolving a genuine legal dispute but rather as a mechanism to delay (tenant's) inevitable eviction." The court found that the "motivation and acts here, spurred on by experienced counsel, at the staunch insistence of the (tenant) at every turn, including threatening actions against its own counsel at the Grievance Committee if the (tenant) did not 'get her way', is blatant, ruthless, and demonstrates extreme disingenuous motive to postpone the surrender of this commercial premises for as long as possible."

A court need not "hold an adversarial hearing when no legitimate dispute exists regarding the attorney fees in question." The court reviewed the factors to be considered in determining whether a fee is excessive. It examined "the bills,…attorney affirmations and the credible testimony" as to "the practice and procedures of the firm in the generation of the bills, the contemporaneous timekeeping records and the production of the monthly bills and payment records…." The court found that the legal bills were "accurate and reflect the proper amount of time for the nature of the services rendered except for one bill…." It opined that the "bills and billing practices of the law firm do not disclose excessive billing, padding, overcharge or other deceptive billing practices."

The court also stated that the landlord's law firm had selected "reasonable courses of action in prosecuting this proceeding." It noted that the loss of rental income was substantial and that "Landlord and Tenant law is technical and complex, and requires a high level of skill." It also stated that this is an "area of expertise in the real estate law that often stumps even long-time seasoned attorneys." Further, the court noted its own expertise in this type of matter based on its experience as a "practicing lawyer" and judge in dealing with these kinds of matters.

The court excluded the cost of legal services rendered between August 24, 2017 and July 31, 2018, on the grounds that the bills for such work was part of the ordinary course of business "for owners of rental property, whether commercial or residential." However, the costs incurred after the tenant had filed bankruptcy and all of the legal services rendered after the dates of June 30, 2018 and July 20, 2018 were recoverable. Thus, the court awarded the landlord legal fees in the amount of $50,010.33, plus sanctions of $10,000.

The court explained that the landlord had been "unfairly deprived of the use of its property for a protracted period and…suffered financial damages including the diversion of resources and time to defend the (tenant's) harsh and unjustified conduct in prolonging this proceeding." Moreover, the tenant's conduct "unnecessarily diverted and depleted the time and talent of more than seven judges from the City, State, and Federal Judiciary." The tenant had been "unwilling to resolve this matter amicably and insisted on this unnecessary and wasteful hearing." Sanctions were not awarded against the tenant's attorney.

Comment: Some parties will use "scorched earth tactics," which include baseless objections to jurisdiction, motions to reargue and appeals, and then claim that the adversary's legal fees are excessive. Parties entitled to recover legal fees in such situations should argue that the fees are a direct result of the adversary's strategies and tactics and the litigation was extremely important, e.g., the damages sought are substantial or there was some other reason why the result warranted the costs of prosecuting the litigation.

Yeshiva Chanoch Lenaar v. Lubavitch, Civil Court, Kings Co., Case No. 092546/2017, decided September 6, 2019, Thompson, J.

Landlord‑Tenant—Building Subject to Rent Stabilization Notwithstanding Reduction of Units in One-Family House

A landlord commenced a summary holdover proceeding to recover possession of one bedroom on the third floor of a single-family house. The landlord had served a 30-day notice of termination, alleging that the tenant was a month-to-month tenant. The petition alleged that the premises were not subject to rent stabilization (stabilization) or rent control, since the building is a one-family house. The tenant moved for summary judgment to dismiss the petition. The tenant claimed that the landlord had failed to plead the "correct regulatory status" and had served an incorrect predicate notice. The court denied the tenant's motion for summary judgment because there were issues of fact requiring a trial.

The tenant had contended that the premises "are de facto Rent Stabilized as a matter of law because (landlord) acknowledges renting 6 bedrooms in a house that was build prior to 1974."

The landlord argued that a single-family house, cannot, as a matter of law, "be converted into a six unit Rent Stabilized building." Although the landlord had rented six bedrooms on the second and third floor of his home, he never made any alterations to such floors and the rooms "are exactly as they were when he purchased the house." None of the rented bedrooms contain a kitchen or bathroom inside.

The court agreed that a single-family home, "utilized as such, would ordinarily not be subject to…stabilization." However, it found that the landlord had not maintained the house as a single-family home and instead, had utilized the house as a six bedroom rental building. The court stated that such "change in use, coupled with the age of the house, can bring a previously unregulated housing accommodation within the umbrella of…stabilization."

The court opined that the landlord's argument, "that his single family house could never become subject to…stabilization, runs contrary to the very concept of de facto…stabilization and is contrary to established case law." The lack of structural alterations or the fact "that the rented bedrooms were not traditional, or even legal apartments" were irrelevant. What was "dispositive is the age of the house and the number of rental units, with 6 units being the trigger point for…stabilization purposes." The court noted that the "addition of rental units, even illegal units, can draw a previously unregulated accommodation into the realm of…stabilization…."

The Stabilization Code (Code), "broadly defines 'housing accommodation' as 'that part of any building or structure, occupied or intended to be occupied by one or more individuals as a residence, home, or dwelling unit or apartment.'" The definition of housing accommodation does not embody any minimum square footage and an individually room in a rooming house "is a housing accommodation." Thus, the court held that the six bedrooms "qualify as housing accommodations for…stabilization purposes."

The landlord also argued that "all other renters voluntarily vacated." At the present time, the only occupants are the landlord's family and the respondent tenant. The court explained that the "subsequent reduction" of occupants did not change the fact that "the rent stabilization status continues."

The landlord also argued that a single-family house cannot be converted into a six unit rent stabilized building since "to do so would violate applicable zoning restrictions," i.e., a one-family home "could never be converted into a legal SRO with lawful housing units because the applicable zoning designation does not allow a multi-family apartment house, and that a zoning variance 'would stand no chance of passage.'"

The subject situation is different from "all other case law (landlord) cites because the subject premises are contained in a single-family home, as opposed to a two-family home or multiple dwelling." One case cited by the landlord held that it would be improper to "permit a perpetual right to renew leases under the…stabilization laws for an illegal basement apartment." The court noted that the petitioner in that case had served a predicate notice pursuant to Code §2524.3(c), as opposed to a 30-day notice of termination that was served in the subject proceeding, alleging that the tenant is a month-to-month tenant.

The landlord contended that any effort to legalize the rented units would be an "exercise in futility." The court explained that "appellate authority is clear that proper procedure must be utilized in terminating these tenancies and the rent regulatory rights should not be disregarded for the sake of expediency." Since the premises are de facto Stabilized, the court held that the tenant could only be evicted "upon grounds set forth in…Code §2524.3 and only after being served with the required notice under…Code §2524.2."

Accordingly, the court granted the tenant's motion for summary judgment and dismissed the proceeding, on the grounds that the premises are "de facto Rent Stabilized and the termination notice served by (landlord) is legally defective for failing to comply with the requirements of terminating a Rent Stabilized tenancy." The court's decision was without prejudice to the landlord "presenting any applicable…stabilization exclusions in a subsequent proceeding and does not deprive (landlord) of its remedy under…Code §2524.3(c)(3), which provides that a tenancy may be terminated when the 'occupancy of the housing accommodation is illegal because of the requirements of law and the owner is subject to civil or criminal penalties therefore.'"

Che v. Sun, Civil Court, Queens Co., Case No. 57468/19, decided Sept. 6, 2019, Poley, J.

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