Landlords and Courts Cracking Down on Tenants Taking Advantage of Their Rent-Controlled Apartments

The rise in popularity of short-term rentals through websites such as Airbnb and Roomarama has given tourists the opportunity to live like locals, and those looking for a place to live for only a month another option to the standard hotel. However, these short-term rentals are causing headaches for neighbors and landlords, and legal troubles for those renting out their homes. In many states, including New York, some short-term rentals may violate state law.

A real estate development and management company recently sued an investment banker and his co-tenant for renting out their leased Tribeca apartment by the night. The tenants leased the rent-stabilized apartment for $1,000 per month, but rented it out for up to $450 per night through Airbnb. The management company alleged that the tenant “began renting the premises to various individuals unknown to plaintiff and without plaintiff’s consent on a daily and/or short-term and transient basis.”

In New York, residents of multi-unit buildings are prohibited from renting their permanent residences for less than 30 days unless the owner or primary tenant remains in the unit. Even when the owner or primary tenant remains in the unit, there cannot be more than two guests. Since the passage of this law in 2010, enforcement has been an issue and the City Council has asked for a funding increase to hire additional. Still, there are thousands of listings on numerous sites such as Airbnb, TripAdvisor, and

Airbnb has said that it aims to give New Yorkers affordable options. But the steep price increase suggests otherwise. The lawsuit estimates that the tenants could make a yearly profit of over $90,000.

Early this year a court evicted a couple from their rent-stabilized penthouse in Manhattan after they advertised the apartment on Airbnb at almost triple the monthly rent. And late last year, an owner of another Manhattan apartment was temporarily stopped form renting out rooms in her apartment through Airbnb.

United American Land v. Krueger

No “sweat equity” where feuding couple splits mid renovation

Seeing marriage in their future, Andrew and Kent decided to buy a house together. They found a property that needed some renovations, but would generate rental income through a separate apartment. Andrew and Kent split the down payment and closing costs. Because Kent had some credit and finance issues, however, the note was only in Andrew’s name.

Andrew and Kent agreed they would split everything down the middle and opened up a joint account to the pay the mortgage and housing expenses. This agreement, however, was never reduced to writing and evidence showed that only Andrew paid the mortgage.

They began renovations in the summer of 2013, with both parties putting in labor. Andrew and Kent’s relationship soon began to deteriorate and ended for good in October of 2013 after a physical altercation at the house. Both Andrew and Kent obtained orders from the family court directing that each was to stay away from the premises and from each other.

Andrew and Kent brought a partition action in which they essentially asked to court to balance the financial equities. To do so the court had to first determine the date on which Kent’s financial obligations for the premises terminated.

Kent claimed that he was forced out and thus any obligations ended in October of 2013; Andrew claimed that Kent voluntarily left the home. There was no evidence that the Andrew changed the locks on the doors or took any other action preventing Kent from entering the house. Rather, is was the family court, through the temporary order of protection, that prevented Kent from entering the house. And a party ousted by an order of protection remains liable for rent or mortgage payments. Therefore, Kent’s obligations continued up until the filing of the partition action.

Second, the court had to determine the financial equity between the parties for the care and maintenance of the premises. Kent argued that he was entitled to a credit for “sweat equity”—the work he put into the premises to make it livable and rentable. The court recognized that “in considering various equities of the co­tenants in partition suit, the court should allow the reasonable value of improvements and repairs to the property, if they were made in good faith and were of substantial benefit to the premises.” But Kent did not produce any evidence as to the value of his work.

Nor did Kent rebut the presumption that the payments made by Andrew for the mortgage and other payments for the upkeep and maintenance of the home was also for the benefit of Kent. There is a presumption that mortgage payments and payments for upkeep and maintenance of a marital home made by a spouse before divorce are for benefit of the other spouse. This presumption is rebutted by proof that one spouse abandoned the other and left that spouse with sole responsibility of maintaining the marital residence. Generally, expenditures made by a tenant in excess of his obligations may be a charge against the interests of a cotenant in a partition action. Since Kent sought one half of the equity of the premises not on the date he alleges to have been “ousted,” but on the date the action was commenced, he certainly did not rebut this presumption.


The court awarded the property to Andrew and ordered Andrew to pay Kent equity of almost $8,000.

Plaintiff Will Be Able to Move Forward With Lawsuit to Partition Mortgaged Property

Hughes­Reddick v. Hughes, 15299/13, NYLJ 1202723952829, at *1 (Sup., KI, Decided April 15, 2015).

A mortgage company has suffered a set back in action brought by plaintiff to partition properties and unencumber her share from mortgages.

Georgia Hughes brought suit to partition two properties in Brooklyn, NY. One of the properties was conveyed to Ira Hughes and Georgia Hughes by deed in 1996. In 1978, the neighboring property was conveyed by the City of New York to Ira with no mention of Georgia. After Ira passed away in 2003, Georgia conveyed both properties to Fatimat Talabi. Talabi then took out mortgages on the properties recorded in the name of Mortgage Electronic Registration Systems.

The plaintiff claimed that Georgia “falsely and fraudulently” deeded the second property to Talibi by stating that Georgia was a surviving tenant in the entirety. The plaintiff also asserted this deed was false and fraudulent because Georgia was not named as a grantee of this property, but only a tenant in common. Thus, when Ira passed away, the plaintiff contended, 25 percent vested in her as a tenant in common and 75 percent vested in Georgia.

Defendant Federal National Mortgage Association (FNMA) s/h/a Mortgage Electronic Registration Systems filed a motion to dismiss, arguing that plaintiff cannot bring an action for petition until her interest in the properties are established. And, FNMA further asserted, the six-year statute of limitations for fraud expired before the action was commenced. FNMA further argued that the fraud claims were not well pleaded.

The court found that the plaintiff failed to allege a cause of action for fraud because the alleged misrepresentations were made to the purchaser, Talibi, not to the plaintiff. But this, the court found, did not necessitate dismissal. Rather, the court found that the “plaintiff’s claims for a judgment declaring that she is seized and possessed as an owner of the properties as a tenant in common . . . are essentially claims to quiet title to the properties under article 15 of the Real Property Actions and Proceedings Law, which is governed by the ten­year statute of limitations.” Because the action was brought within 10 years of the conveyance to Talabi, it was timely.

The court reason that when determining whether a pleading states a cause of action, the sole criterion is whether the facts, taken together, “manifest any cause of action cognizable at law.” And when a person claims an interest in property, she may bring an action to quiet title. Under the circumstances alleged, the plaintiff would still have an interest, as a co-owner with Talabi, as a tenant in common because Georgia would not have been able to transfer the plaintiff’s interest.

This ruling could signal a big loss for FNMA as a mortgage taken about Talabi would only give the mortgage security up to the interest or her property.

Cooperative’s Actions Place Cloud Over Penthouse Purchase

A buyer entered into a contract to purchase a penthouse apartment from defendants for $27.5 million and paid a deposit of $2.75 million. The parties intended to close after obtaining the cooperative corporation’s board of director’s consent to the sale.

Of primary importance to the buyer was that he had exclusive use of the apartment’s terrace, which right was found in the proprietary lease. The stairs that reached the terrace had only been used for maintenance purposes and other shareholders had never been granted access to the rooftop. In fact, the only way to reach other areas of the rooftop was to traverse the terrace. Shortly after the contract was signed, the Board, quickly attempted to eliminate buyer’s, as the prospective owner, exclusive right to the terrace by sending a letter explaining that the roof top was a common area.

Even though the Board approved of the sale without any conditions a month after the sale, two months later it sent an email to the parties proposing a “conditional consent agreement” stating that the plan of the penthouse was “either missing or lost”; that the entire roof is a common area; that the cooperative and shareholders have the right to use the access stairway and a path to other areas of the rooftop. Both parties were troubled by the Board’s position and declined to sign it. The seller brought an action against the cooperative seeking a declaratory judgment that the sale be unconditional. The cooperative withdrew its requirement, but the seller never got the declaratory judgment.

Unsatisfied, the buyer informed the seller that he was cancelling the contract and requesting the return of the deposit because the current floor plan was not substantially similar to the contract plan because the current plan included the maintenance stairway. The cooperative obtained a new plan omitting the staircase, but the board never withdrew its position in the original letter or unequivocally and affirmatively acknowledge the buyer’s exclusive right to use the terrace. When the seller would not cancel the sale, the buyer sued for return of his deposit.

The trial court held that the seller was ready, willing, and able to close at the time-of –the essence closing, and because the buyer failed to appear at the closing, the seller was entitled to the deposit.

On appeal, the court reversed summary judgment in favor of the seller. The court found that the seller failed to adduce evidence that the cooperative unequivocally withdrew its position with regard to the penthouse owner’s right to exclusive use. Thus, even if the final floor plan was substantially similar to that in the contract, the seller did not show that the Board recognized the seller’s right to exclusive use of the terrace. Because the cooperative had earlier attempted to interfere with the buyer’s right to exclusive use, rousing suspicions that it may attempt to do so again, the seller needed to obtain a full retraction before it could close the sale. Anything short of a full retraction is inadequate.

Because the seller did not have a full retraction, it could not demonstrate an ability to close. Moreover, as long as there was no promise that the cooperative wouldn’t attempt to interfere in the future, the buyer had a lawful excuse from attending the closing.

In reversing and remanding, the court noted that discovery may reveal the buyer did receive requisite assurances and that the plans were substantially similar.

Judgment Against Real Estate Mogul Has Been Affirmed

Real estate mogul Harry Macklowe has received a resounding defeat by the New York Appellate Division regarding his litigation with Warren Cole, his former business right-hand man.

Supreme Court Justice Cynthia Kern’s grant of summary judgment on Mr. Cole’s breach of contract claims were affirmed by a unanimous panel.
A $30 million judgment against Macklowe personally was also affirmed by the appeals court.

This is the sixth time in nine years that the respective parties have appeared in front of the appellate court. This legal dispute came from a limited partnership agreement between Macklowe and Cole, in which Cole would be justly compensated with percentage interests in real estate properties in which Macklowe’s firm were shareholders.

The major issue of the appeal was “the interpretation of the plain language of a limited partnership agreement whereby plaintiff was obligated to sell his partnership interest upon the termination of his employment with defendant.”

Justice Rolando Acosta’s written opinion stated that even though Cole had agreed to a limited partnership agreement in 1994, and a requirement that Macklowe purchase Cole’s 9% interest had been triggered by Cole’s departure in 1999, Cole technically continued to retain his interest as no official sale had ever been consummated.

The property owned by the partnership was sold in 2008 for $231 million, 9% of which was due to Cole under the agreement, according to his claims.
Cole’s argument was that his obligation to was dependent on Macklowe’s setting the purchase price, “which he did not do,” Acosta stated in the written opinion.

Construing a standard limited partnership agreement “buy-sell” clause that requires a buyout of the departing partner’s interest by the partnership at an “‘arms’ length sales value,” the panel said the record was clear that Macklowe had failed in 1999 to make a “proper offer.”
“While the [partnership agreement] does not clearly spell out all the mechanics of executing the buy-sell provision, it is implicit that the initial step was Macklowe’s valuation of the partnership interest,” Acosta said.

The opinion asserted that a 1999 offer by Macklowe to purchase all of Cole’s interests in more than 30 properties for $2.5 million did not constitute an “offer” under the buy-sell provision of the agreement at issue.

That Macklowe failed to prepare and tender to Cole a proper valuation statement for the 1994 agreement was not under dispute. Therefore no further discovery was needed to evaluate whether the offer in 1999 could satisfy the agreement, as ruled by the judicial panel.
The panel rejected claims by Mr. Macklowe that Cole’s claims were barred by waiver doctrines.

In fact, Acosta wrote that “Cole’s inaction does not raise any issues of fact with respect to defendants’ affirmative defenses because the [partnership agreement] imposed no affirmative duty on Cole, even after his employment terminated, to take action to maintain his partnership interest.”
The opinion noted that a previous dismissal case had been reversed by the First Department. Other rulings had given rewards of more than $12 million in damages to Mr. Cole based on claims regarding other properties.

Can a Cooperative Apartment Be Partitioned?

Where owners of real property cannot agree on the continued ownership or operation of a property, they may commence an action for partition in Court seeking the public sale of the property. The proceeds from the sale are then distributed amongst the owners in accordance with their respective interests.

An person holding an ownership interest in a cooperative apartment however does not technically own real property. Rather, shares in the cooperative are owned which entitle the shareholder to occupy a unit pursuant to a proprietary lease. The cooperative shares owned by the unit owner are considered personal property. Where there is a breakdown in the relationship of owners of a cooperative apartment and, and one wishes to sell the cooperative unit, many people question whether they may maintain an action for partition of the unit.

Generally, the law allows for the partition of a cooperative unit and such a litigation to be commenced. New York RPAPL §901(1) is available to permit the partition of cooperative apartments, which defines partition as “the act or proceeding by which co-owners of property cause it to be divided into as many shares as there are owners, according to their interest therein, or if that cannot be equitably done, to be sold for the best obtainable price and the proceeds distributed according to the respective interests. Chiang v. Chang, 137 A.D.2d 371, 529 N.Y.S.2d 294 (1st Dept. 1988). A partition action of a cooperative unit may not be allowed in the event the cooperative’s by-laws or proprietary lease do not permit partition. Even if those documents do, the cooperative may still need to approve the sale of the cooperative unit to a potential buyer at any public sale.

Therefore, the partition of a cooperative apartment is permissible however with some caveats, specifically the governing cooperative documents.

For any questions related to a partition action, you may call Peter Moulinos at 212.832.5981.

Are You Aware Of These Updated Regulations For Property Owners?

In interesting news, new regulations were finalized by the United States Department of Treasury regarding income taxation of property owners. Expect dramatic and significant ramifications. It took almost ten years of government efforts to reduce the confusion and subsequent litigation concerning what expenses may be deducted, as opposed to what expenses must be capitalized. These regulations are typically known as Tangible Property Regulations or the Repair Regulations.

As of now, any taxpayer may deduct all of their ordinary business expenses incurred in its respective trade, including repairs. It must be noted, though, that Code Section 263(a) of IRS Section 162 states that no deduction is permitted for expenses used for “new buildings..or improvements…made to increase the value of any property.”

According to these updated regulations, a taxpayer must divide his or her assets into “units of property.” A “unit of property” is typically a single building, while a “major component” is defined as a part or combination of said parts that perform an important task in the operation of the unit. The taxpayer must capitalize the expense if it does replace a significant portion.

To consider a brief example, say a taxpayer owns a significant office building with 300 windows. The office building itself is considered a “unit of property,” while the windows are considered a “major component” of the building. If the taxpayer fixes 200 windows, they are replacing a significant portion of the “major component,” and the taxpayer must capitalize the cost of those windows.
However, if only 100 windows are replaced, a significant portion of the major component would not be replaced, and the 100 windows may be deducted.

Under these updated regulations significant expenses may be deducted that may have previously had to be capitalized. As another example, what if a taxpayer owned a 10-story structure and decided to repair the lobby floors? The entirety of the building’s floors would be considered a major component. Therefore, the taxpayer has decided to improve a mere 10% of said major component. These renovations could be thus be deducted, since a large portion of the major component would remain untouched.

It must be noted that these regulations contain exceptions that still require capitalization. It is strongly recommended that these be studied in detail. As an example, a taxpayer is required to capitalize an expense if it is involved in restoring a property that had experienced a measure of deterioration to the extent that its intended use is compromised. An expense must also be capitalized if it is paid to adapt a property for an alternate use.

An expense must also be capitalized if it is used for the betterment of a unit of property, including the expansion of a building. If an improvement happens to substitute a substantial structural part of a property, the improvement must be capitalized.

These new rules are a minimal part of the property regulations. As of January, 2014, the regulations are generally in effect. If any taxpayers own pre-existing property they may be required to alter their methods of accounting.

Unit Owner Claims Against Sponsor of Condominium For Construction Defects

With the increasing construction of new condominiums in New York, there is sure to be an increase of claims by unit owners against the sponsor of a condominium for defective and poor construction. Such was the case in the mid and late 2000s when many lawsuits were filed against sponsors for failing to construct a condominium in accordance with the specifications set out in the condominium’s offering plan. During those lawsuits the question arose whether the sponsor breached its warranty which comes with the sale of every new condominium unit sold in New York.

New York State law provides that each single family home, cooperative unit or condominium unit sold by a developer or sponsor be subject to a construction warranty. The law is known as the New York State Housing Merchant Implied Warranty Law, pursuant to General Obligations Law Section 777-a, and provides for the following warranties:

i. one (1) year from and after the warranty date the home will be free from defects due to a failure to have been constructed in a skillful manner;
ii. two (2) years from and after the warranty date, the plumbing, electrical, heating, cooling, ventilation systems must be free from defects due to a failure by builder to have installed such systems in a skillful manner; and
iii. six (6) years from and after the warranty date the home will be free from material defects. This includes physical defects in the structural elements such as foundations, floors, walls and roof framing which make it unsafe or unlivable, pursuant to the Offering Plan, Rights and Obligations of Sponsor.

A sponsor or developer can limit these warranties however cannot shorten the time periods within which they apply. The warranties also do not apply to defects not caused by defective workmanship, materials or design or those defects which were obvious, or would have been obvious, upon inspection. Defects in items sold with a home, such as refrigerators, ovens and air conditioners are not subject to the warranty. A unit owner must also give timely notice to a sponsor or developer in order to claim a breach of warranty.

In order to ascertain the terms of a warranty, a unit owner should review the condominium’s offering plan to determine whether the warranty has been limited, modified or, in some cases, waived by the unit owner at the time it purchased the unit.

For any questions regarding construction defects in condominiums, cooperatives or newly constructed single family homes, please feel free to contact Peter Moulinos at 212-832-5981.

Appellate Division Grants Yellowstone Injunction to Commercial Lease Tenant

In the case of Artcorp. Inc. v. Citirich Realty Corp., Peter Moulinos represented the Plaintiff Artcorp which is a tenant under a commercial lease. The landlord, Citirich Realty, sought to evict Artcorp from its commercial lease premises on the basis that it defaulted under its lease by effectuating an illegal assignment via the transfer of the ownership of Artcorp from one person to another.

On an application to the Supreme Court for the State of New York, County of New York, for a yellowstone injunction, the Hon. Nancy Bannon ruled that Artcorp was not entitled to a yellowstone injunction. A yellowstone injunction prevents a landlord from terminating a commercial lease when a landlord serves a notice of termination on a commercial tenant and the tenant indicates a desire to cure any alleged default. The lower court failed to set forth a valid basis for denying Artcorp injunctive relief.

On appeal, the Appellate Division, First Department, reversed the lower Court’s decision and granted Artcorp a yellowstone injunction. The Appellate Division stated that To obtain Yellowstone relief a tenant need not show a likelihood of success on the merits and that a commercial tenant can simply deny the alleged breach of its lease. The Appellate Division ruled that Artcorp “clearly asserted its willingness to cure the allegedly improper assignment of its shares, and had the ability to do so either by
transferring its shares back to the deceased owner’s estate or by seeking consent from the landlord”. More importantly, the Appellate Division ruled that a cure of an alleged improper assignment of a commercial lease may take place after the assignment by seeking the consent of the landlord. This decision sets a favorable precedent for commercial tenants in New York.

Homeowners Allowed to Pierce Corporate Veil In Contractor Suit

In a huge win for homeowners seeking to recover damages against a construction company arising from the company rendering services at the homeowners’ real estate residence, the Court allowed the homeowners to pierce the corporate veil and pursue their judgment against the individual shareholder of the company.

In the case of Irvine v. Raven Industries Inc., the plaintiff homeowners sued the defendant construction company and obtained a judgment for $187,690.55. The company however was insolvent and the homeowners could not collect their judgment against the company. After serving a restraining notice on the company, the company’s owner transferred ownership of a truck which was owned by the company to the owner, individually. The court found that this transfer was deemed a civil contempt and a fraudulent transfer which was not made for any reason other than to avoid the homeowners’ judgment. By doing so, the Court also found that the company was so dominated by its owner that it allowed the piercing of the corporate veil and to hold the owner personally liable for the full judgment in favor of the homeowners.

According to Peter Moulinos, a real estate attorney, this decision was important in that it allowed a plaintiff the opportunity to collect a judgment which would have been worthless and uncollectable against the construction company. Decisions such as this one allow homeowners to pursue claims against contractors who may be tempted to liquidate a company in order to avoid enforcement of a judgment.