October 10, 2017
By Adam Leitman Bailey and Dov Treiman
As the city of New York seeks to phase out its use of rent-stabilized apartments as shelters for homeless people,1 the organizations that administer this program struggle for funding, and the courts struggle to find the correct theoretical framework to determine if the units are still rent stabilized and, once the homeless persons are replaced with conventional tenants, what legal category into which to place the new occupants. The race is on. With homeless populations continuing to swell2 and charitable organizations looking to help house them, a thorough understanding of the applicable principles of rent stabilization is becoming increasingly essential. The recent decision of the Appellate Term, First Department in 2363 ACP Pineapple v. Iris House3 highlights practitioners’ misunderstanding of the theoretical issues.
In Pineapple, in under 1,000 words, the Appellate Term for the First Department ruled in a case where at the behest of the city, a private landlord rented premises to a city-funded program for the temporary housing of homeless persons. Assured that such units were exempt from rent regulation, at the conclusion of the lease, the landlord sought to evict the occupants, using one of the charitable-use exceptions to rent stabilization. The court refused to allow it.
The basic principle of rent stabilization in New York City,4 is, with certain exceptions, that it applies to all apartments “except (certain classes of) housing accommodations for so long as they maintain the status” that gives them the exemption.5 These categories of exemption are (a) rent control, (b) government ownership, (c) Mitchell Lama and similar programs, (d) small buildings, (e&o) substantially rehabilitated buildings, (f) apartments held by affiliates of charities, (g) certain hotels, (h) motels and trailers, (i) boarding houses, (j) charitable accommodations, (k) nonprimary residences, (l) cooperatives and condominiums, (m) employee occupied apartments, (n) nonresidential apartments, (p) expired 421-a in small buildings, (q) exempt lofts, (r&s) luxury decontrolled units, (t) units specifically deregulated by other laws.6
Theories of Shelter Exemption
For private landlords, this presents three conceivable categories for deregulation of these apartments, each with its own problems.7
Fully stated, the categories are as follows:
(f) housing accommodations owned, operated or leased or rented pursuant to governmental funding by a hospital, convent, monastery, asylum, public institution or college or school dormitory or any institution operated exclusively for charitable or educational purposes on a nonprofit basis and occupied by a tenant whose initial occupancy is contingent upon an affiliation with such institution; however a housing accommodation occupied by a nonaffiliated tenant shall be subject to the RSL and this Code;
(j) housing accommodations in buildings operated exclusively for charitable purposes on a nonprofit basis; (k) housing accommodations which are not occupied by the tenant not including subtenants or occupants as his or her primary residence as determined by a court of competent jurisdiction.
The first of these, §2520.11(f), is the so-called “affiliation exemption,” most fleshed out in cases involving Columbia University and New York University. This grants an exemption to apartments that are owned by certain kinds of educational institutions and charities for apartments rented to these organizations’ affiliates. That case law does little to reflect what “affiliation” is, but typically it means either as a member of the staff of the institution or as an enrolled consumer of the institution’s services—thus, in the scenarios described, typically faculty and students.8 Clearly, in these shelter situations, the sheltering organization may enter into an agreement with the sheltered person setting forth the parameters of the relationship. However, the Pineapple case points out that the exemption can only be claimed by the institution, not by the private landlord overleasing to the institution. In this regard, Pineapple says, “The exemption was not intended to allow a for-profit landlord to evict an educational or charitable institution.” There is a problem with this kind of analysis. RSC §2520.11 in its preamble says, “This Code shall apply to all or any class or classes of housing accommodations made subject to regulation pursuant to the RSL or any other provision of law, except the following housing accommodations for so long as they maintain the status indicated below.”
Note that the applicability of Rent Stabilization is to “housing accommodations.” It is not applicable or non-applicable to natural or artificial persons. That is to say that rent stabilization is in rem (meanings acting on the premises rather than on any particular person) and not in personam (meaning acting on a particular person). Note also that even in purely personal considerations like primary residence, the effect of the nonprimary residence is not to make the tenant unstabilized, but to make the apartment such. So, if the exemption is in rem, as the plain wording of the regulation indicates, then it matters not who is invoking the exemption. Thus, it appears that Pineapple’s analysis is flawed. However, we note as a matter of proof, that the landlord would not normally be in possession of the agreement between the shelter provider and the sheltered and getting it may be difficult in light of the highly restricted discovery rules in summary proceedings. Even if the landlord prosecutes this as a relatively expensive plenary proceeding in state supreme court, easier discovery rules do not guaranty that the landlord will be able to obtain possession of a lease with an affiliation clause. The landlord has no control over what the lease does and does not say; only the sheltering organization does.
Charitable Use Exemption
The second exemption, §2520.11(j), is the “charitable use” exemption. However, where only a portion of a building is being used for this purpose, according to the terms of the exemption, requiring that the building itself be “operated exclusively for charitable purposes,” it is inapplicable. This is particularly significant in the current political atmosphere where the use of these buildings some for shelter and some for conventional tenants has become a matter of particular controversy.9 Landlords are faulted for mixing the use, but only the pure use of the building for sheltering allows for a landlord to invoke this exemption. However, it should be noted that if the landlord net leases the building to the sheltering organization, HPD, under certain circumstances, insists that the apartments be registered with the DHCR as rent stabilized, even though this provision of the Code explicitly says that these apartments are at least temporarily exempt.10 However, the law is clear that if an apartment is exempt, it is exempt, even if registered as stabilized.11
Primary Residence Exemption
The third exemption, §2520.11(k), is the “primary residence” exemption. This has always been a widely misunderstood exemption and the mischief lies in the qualifying phrase, “as determined by a court of competent jurisdiction.” In standard landlord-tenant litigation practice, in bringing a summary proceeding to evict a tenant for failing to maintain the apartment as a primary residence, the petition usually sets forth that the premises are subject to rent stabilization.
The theory behind this is that at this moment, the premises have not already been adjudicated a nonprimary residence and therefore the “as determined by a court of competent jurisdiction” criterion has not yet been met. So, in order to invoke this exemption during a subsisting tenancy, it virtually has to be in the context of a completed declaratory judgment action in Supreme Court. Of course, such a proceeding is bound to be lengthy and expensive. With 615 Co. v. Mikeska,12 the Court of Appeals ruled that the Supreme Court action has to be commenced during the so-called “Golub period,” between 90 and 150 days prior to the expiration of an extant lease, at least if the proceeding contains more than a mere declaration and also contains a cause of action for eviction.13
However, Mikeska does not address the idea that the landlord could obtain a naked declaration and then bring a summary proceeding in due course afterwards with the actual question of primary residence one already established under principles of collateral estoppel. While somewhat cumbersome, these cases may be the very ones that call for that kind of procedure. After all, this is not a disputed question as to whether the human tenant is actually spending the correct amount of time in the subject premises. Rather, this is the straightforward question whether the wording of a corporate lease calls for a particular human being to dwell in the premises as that particular human’s primary residence. That is a pure legal matter of reading the lease, one perfect, therefore, for summary judgment and one which, one notes, the shelter provider cannot, in good faith, oppose.
During the Relationship
To this point, this article has implicitly focused on ending the relationship. However, nonpayment proceedings14 during the relationship share with holdover proceedings15 certain procedural difficulties. Under the common law of RPAPL §741(4), a landlord is required to plead the regulatory status of residential premises that are the subject of a summary proceeding in the New York City Civil Court.16 Thus, for these sheltering apartments, the landlord faces an impossible choice between getting the petition dismissed for claiming the premises are not regulated in a claim that the court does not sustain for the reasons we stated above or claiming that the premises are regulated, requiring the landlord to offer a renewal lease when the lease is set to expire.17 Thus, unless the landlord is willing to accept a legal determination that the premises are subject to rent stabilization, the landlord risks having no coercive method by which to collect the rent, except through the expensive and slow plenary ejectment action.
The Word on the Street
The word on the street is that Pineapple has ruled that all apartments that are rented as homeless shelter space are now under rent stabilization. That vastly overstates the case but there is a case pending in Brooklyn to declare exactly that.18 Clearly, if an entire building is being used as such a shelter, the landlord has a safe path to regarding the building as temporarily exempt from rent stabilization. The other theories are less certain. However, under rent stabilization, lease renewal is mandatory. So, landlords who listen to this word on the street and are scared into refusing to renew leases for such purposes may find that Pineapple becomes an aggressive tool by which to require that the landlord stay in such an uneasy business association. Worse than that for landlord interests, a finding of rent stabilization in such units would lay limits on the amounts of rent that could be charged and how much it could be increased on renewal. Thus, any landlord who is renting out such an apartment is strongly incentivized to fight any theory under which the apartment could be considered subject to rent stabilization. The very least effect that Pineapple has had on the real estate industry is to make increasing numbers of legitimate landlords absolutely unwilling to rent to these homeless programs, providing temporary shelter for 11,000 people.19
The Pineapple decision has created great panic among a large swath of landlord interests. There are errors of analysis in that decision that should incentivize those landlords to pursue these theoretical issues in other appellate courts. However, Pineapple does not for all landlords renting to homeless shelters create an untenable situation. To that extent landlords’ panic is overstated, but the situation is such that landlords now cooperate with the city and with charitable agencies at their peril.
2A recent year saw a nearly 20% rise in homeless shelter populations. https://www.nytimes.com/interactive/2015/10/21/nyregion/new-york-homeless-people.html
3 55 Misc.3d 7, 49 N.Y.S.3d 216, 2017 N.Y. Slip Op. 27047.
4 The Rent Control Law of 1969, New York City, Local Law No. 16-1969, originally §§ YY 51-1.0 et seq. (The City Record, May 13, 1969); The Emergency Tenant Protection Act of 1974, L.1974, c. 576.
5 RSC §2520.11.
6 RSC §2520.11.
7 That each would present a problem is unsurprising. The designers of Rent Stabilization through the years never envisioned having to deal with a scenario in which the occupant was meant to pay no rent.
8 Pineapple, supra.
10See 28 RCNY §6-01 exempting these units from being considered hotels and thus, according to HPD, rendering them apartments, subject to DHCR registration if the building is part of the 421-a program.
11512 East 11th St. HDFC v. Grimmet, NYLJ 1/7/91, 23:4, 19 HCR 9C (App.T 1st Dep’t).
12 NY2d 987, 556 NE2d 1069, 557 NYS2d 262.
13 This period is named for Golub v. Frank, 65 NY2d 900, 483 NE2d 126, 493 NYS2d 451 (1985), but the case’s holding, that one must serve a notice of intent not to renew during the period one would normally be offering a lease renewal, was codified into the modern Rent Stabilization Code when it was issued in 1987.
14 RPAPL §711(2).
15 RPAPL §711(1).
16 While MSG Pomp Corp. v. Doe, 185 A.D.2d 798, 586 N.Y.S.2d 965 (1st Dept. 1992) is of dubious continued value as to its doctrine of nonamendability of mispleaded status (185 A.D.2d at 800), it remains solid law for the proposition that one must, in New York City Civil Court, in residential proceedings plead the regulatory status of the premises.
17 Offered during the aforesaid Golub period.