By Adam Leitman Bailey and Dov Treiman
Most attorneys and nearly all educated tenants in this State are aware of the existence of the warranty of habitability. Few may know that it is statutory in basis, fewer care that it contradicts the common law, but most would be surprised by the types of occupancy to which it does and does not apply. Even more surprising to most would he the effect it has on the mortgage foreclosure process.
While none of these doctrines are exactly new, they are enjoying a new prominence in the popular and legal press because tenant advocacy groups are finding that the epidemic of foreclosure has brought with it a renewed pandemic of neglected housing.
Where a landlord has lost the ability to pay its mortgage, it fairly predictably stops doing repairs to the building, if the tenants seek to have the building maintained, as through court proceedings, finding a funding source for the repairs can be challenging.
Understanding the Cycle
In order to put the entire process in perspective, one must realize that neglect of repairs and inability to pay the mortgage is, in most buildings a self-feeding cycle that virtually guarantees that the tenants will live in ever increasing squalor until the building itself is, of public necessity, torn down.
While facially a great benefit to tenants, the warranty of habitability found in Real Property Law [section] 235-b, winds up working against tenants and for nobody once this cycle initiates.
This is how it goes: The landlord, for whatever reason, starts neglecting repairs. This can be for any number of reasons. These can include, for example, that the landlord is simply unscrupulous and seeking to yank as much money out of the building as possible while spending as little of it as possible back on the building.
This was a fairly common model in the late 1970s and early 1980s and led to the devastation of square miles of the South Bronx.
The Bronx was particularly vulnerable to this kind of practice due to a number of factors, notably including the construction of the Cross-Bronx Expressway in the 1960s had destroyed huge swaths of middle class neighborhoods, rendering previously desirable housing undesirable by reason of the sudden presence of an interstate highway as a next door neighbor churning out vast amounts of dust and noise.
Similar but less severe results obtained in swaths of Brooklyn disturbed by the earlier construction of the Brooklyn-Queens Expressway.
However, eventually the scars on neighborhoods caused by these megahighways healed and these neighborhoods, especially those well served by the subway system, became once again desirable places to live and therefore desirable places to invest. That, however, was the set up for the current wave of neglect.
The very desirability of these locations drove the prices of the buildings very high, especially as it appeared increasingly easy to build either a cooperative, a condominium, or even a rent regulated building with the tax breaks associated with the J51 program.
However, when the financial systems melted down in 2008, there suddenly appeared on the market a glut of overpriced, over-mortgaged buildings, all with negative equity’.
Even unregulated buildings became unable to carry their own mortgages because the tenants themselves lacked the funds to pay the higher rents. And in regulated buildings, so-called “preferential rents” where a landlord charges significantly less than the law allows, came very much into vogue.
So the landlords found themselves simply unable to pay for repairs to the building, particularly because the building was carrying a mortgage inflated far beyond the building’s recession adjusted equity.
Once the landlord started neglecting repairs, tenants, correctly so, started claiming entitlement to an abatement in rent for breach of the warranty of habitability.
Since they were right, this meant that the landlord got still less rent and still less ability to effect repairs. He certainly could not fund the repairs by borrowing more on the building–it was already over-mortgaged. So the neglect of repair became more severe, leading to still lower rents, and so on.
Foreclosure became inevitable.
Dangers from Receivers
Now, with income producing property, one of the most usual early steps in the foreclosure is the appointment of a receiver to take in the income of the property and to disburse it for the purpose of the preservation of the property so it will bring as high a price as possible at the auction that lies near the end of the foreclosure process.
Yet, one decision, Fourth Federal Savings Bank v. 32-22 Owners Corp.lies like an alligator under the surface of a pond waiting to snap its jaws at any passing prey.
Under Fourth Federal, if a receiver seeks to collect rent where there has been a violation of the warranty of habitability, not only is the receiver’s claim for rent defeated, but the tenant can procure an order from the receiver’s appointing court–during the term of the receivership, in other words before the building is sold in the foreclosure sale that the foreclosing party pour more money into the building to effect the repairs required by the warranty and, of course, also required by the various municipal codes.
So long as the foreclosing party does not move for such a receiver, there is no case imposing that kind of wash back liability.
While this could theoretically discourage the bringing of foreclosure actions in the first place, for foreclosure counsel it should certainly make them think twice about moving for the appointment of a receiver.
Limits of the Warranty. While this outcome is supposed to be tenant-friendly, consider how tenant-hostile it is in practice. If there is a receiver, the receiver is as liable on the warranty of habitability as anyone.5 If, on the other hand, the tenants start a rent strike under Article 7A of the Real Property Actions and Proceedings Law, the administrator appointed by the Civil Court is also equally subject to the warranty of habitability.6 Even if the building is sold for taxes and the building comes under New York City ownership, the city is still bound to the same rigors of the warranty of habitability. 7 Even if after the building is sold for taxes, the city sponsors a cooperative apartment corporation and returns the building to private ownership, it does not help the tenants. Cooperative apartment corporations are also bound by the warranty of habitability,8 even as to the common areas.9 While condominium units are not directly subject to the warranty of habitability,10 when the city re-privatizes a building, it is always in the form of a cooperative, never a condominium.
Unconventional Wash-Back Liability. In all the scenarios we have discussed, there is no question that the tenant is a tenant; rather it is the ‘landlord’ who may be somewhat difficult to recognize as such. The sole exception to this is a condominium owner who is no species of tenant at all, but rather the owner of a dwelling in fee simple absolute, the vertical equivalent of owning a one-family home. Yet even for these owners, the warranty of habitability can become an issue—not one favoring the unit owner, but rather one that cuts against the owner. That is to say that when a unit owner rents out the unit to what we would normally be inclined to call a ‘‘subtenant’’ but who is in fact a tenant, the unit owner takes on the landlord side of the warranty of habitability and is the warrantor, rather than the warrantee.11 The situation is somewhat different in a coop, however. There the unit owner normally is a tenant. If, however, that tenant rents the place out to a subtenant, the unit owner, being out of possession, has no claim to the warranty of habitability,12 but rather is responsible for the warranty to the subtenant.13 The unit owner bears the liability to the subletting occupant; the coop itself has no such liability.14
When we look at all of this through the lens of washback liability under Fourth Federal, we see that in conventional landlord-tenant buildings, the foreclosing bank may want to think twice before appointing a receiver. In a foreclosure on a cooperative apartment house, the same holds. In foreclosing on an individual cooperative unit, the procedure does not call for a receiver, so there is no issue. In foreclosing on a condominium, the only wash-back liability issues could come from persons to whom the individual unit owners have rented their units.
Other Sources of Liability. Of course, when looking at the questions of repairs to a building, the warranty of habitability only speaks to contract liability. One therefore should not ignore the questions of tort liability, specifically what happens if someone gets hurt by the shoddy condition of the building. The answer to this question has always lain not purely in terms of who owns the building, but also in terms of who controls the building.15 So, when a mortgagee brings a foreclosure proceeding against the mortgagor, if there is no appointment of a receiver, tort liability remains that of the mortgagor alone up until the very moment the title to the building passes by the execution of the deed as a result of the foreclosure auction.16 Further, there is no responsibility on the part of an out of possession mortgagee (foreclosure plaintiff) to comply with state and local building or housing codes or to make any other repairs.17 However, any receiver would have such liability both with respect to complying with building and housing codes and in tort if someone is injured.18
Mortgagees in Possession. Many older mortgages and some new ones allow for the mortgagee to short-circuit the receiver process and step directly into possession. However, this gives the mortgagee the worst of both worlds. First, it makes the mortgagee totally personally liable to its last penny for anything in the building— warranty of habitability, building codes, injuries, anything. Secondly, it places the building in a legal position where nobody has the statutory authority to bring a summary proceeding for unpaid rent.19
Conclusion. It is easy in all the situations we have discussed to look for villains. Yet there is nothing villainous about an honest tenant wanting decent housing; nothing villainous about a bank wanting its mortgage repaid; nothing villainous about an honest businessperson simply not being able to make a go of it. So without anyone to blame, there is nobody to point to as a logical one to have to pay for the damage. Several decisions have hinted that the only possible solution lies in legislation, but since there is no government feeling particularly flush at the moment, whatever the legislative solution would be it can only reallocate the pain.