Source: https://www.alblawfirm.com/articles/fair-market-tenants-and-condominium-conversions/
Timestamp: 2019-04-19 15:21:47+00:00

Document:
A recent newspaper article reports that between 2009 and 2012, a total of 117 rental buildings in Manhattan and Brooklyn were converted to cooperative or condominium ownership.1 Many of the units contained therein were deregulated. This article explores what rights tenants of these units have vis-à-vis rent-regulated tenants when a building is being converted, if and how fair-market tenants can obtain benefits similar to those enjoyed by rent-regulated tenants upon a conversion, and the effect of leasing units at fair-market rents both before and after a conversion.
The Martin Act2 governs the conversion of rental buildings to cooperative or condominium ownership. Substantively, the statute allows for an “eviction plan” to be declared effective if 51 percent of the tenants enter into agreements to purchase their units.3 However, the much more common practice now is for sponsors to offer a non-eviction plan which may be declared after sponsors enter into contracts for at least 15% of the units in the building with either bona fide tenants in occupancy or purchasers who represent that either they or members of their immediate family will occupy the apartment when it becomes vacant.4 Once the plan is declared effective, the sponsor can file a declaration and the condominium is officially created. The sponsor will then close on sales of the units to individual purchasers.
Under the Martin Act, rent-stabilized and rent-controlled tenants who chose not to purchase their units are entitled to the status of “non-purchasing tenants” and essentially go on as before except, if the apartment is purchased by an investor, with a different landlord. As the statute provides, “[n]o eviction [can] be commenced at any time against non-purchasing tenant for failure to purchase or any other reason applicable to the expiration of the tenancy…”5 Moreover, rentals for such non-purchasing tenants “shall not be subject to unconscionable increases beyond ordinary rentals for comparable apartments during the period of their occupancy.”6Stated somewhat differently, the regulated tenants may elect to retain their protected rent-stabilized and rent-controlled status under GBL §352-eeee(2)(c)(iii). However, fair-market tenants, who enter into lease agreements with the landlord/sponsor suffer a different fate.
In MH Residential 1 v. Barrett,8 the First Department found that where the lease of a fair-market tenant expires prior to the time the attorney general accepts the sponsor’s offering plan for filing, the tenant cannot be considered a non-purchasing tenant and therefore is not entitled to remain in the apartment.
On appeal to the Appellate Division, the tenants argued that a landlord-tenant relationship with the sponsor did indeed exist because, under the Real Property Actions and Proceedings Law,12 a tenancy does not formally terminate until a warrant of eviction is issued by the court. Thus, the tenants claimed, because warrants had not been issued, they remained as tenants in occupancy on the date the plan was accepted for filing, and were therefore entitled to receive renewal leases at not unconscionable rents.
At the Housing Court level, it came to light that one tenant was suffering from stage four cancer and another was over 90 years of age and had lived in his apartment for more than 50 years. Yet, the Housing Court did not find these conditions to constitute the type of “special circumstance” that the Appellate Division previously mentioned.
The Appellate Division Second Department, which covers Brooklyn and Queens together with several other counties, has not been presented with a fact pattern similar to MH Residential, rendering it difficult to determine whether that court would adopt the First Department’s interpretation of coverage under the Martin Act. However, given the split of opinion between the two departments regarding another aspect of Martin Act coverage, uniformity may well be absent here as well.
An odd feature of the Martin Act is that while the unregulated tenants cannot obtain statutory protection during the conversion process, they may, depending on the jurisdiction where the building is converted, obtain protection post conversion.
Second Department View. The Appellate Term, Second Department has taken the opposite approach to post-conversion sponsor rentals. In Geiser v. Maran,23 a case involving a cooperative rather than condominium conversion, the court held that the “process of conversion” does not end when title to the building is transferred to the cooperative corporation but rather when all the unsold shares held by the sponsor are sold to bona fide purchasers. Geiser followed the principle, first laid down by that court in Paikoff v. Harris,24 that tenants who entered leases with sponsors after the effective date of the plan would be free from eviction and entitled to continued leases at comparable rents.
If a sponsor chooses to rent an apartment after the conversion rather than to sell it, this will ordinarily be because market conditions favor a rental over a sale. When these conditions change, the sponsor will again find it advantageous to discontinue renting. If it was the Legislature’s intent to protect tenants from dislocation caused by the shift in the owner’s economic interest, it could only address the problem thoroughly by protecting tenants that rent from sponsors after the conversion as well as those in possession at the time of the conversion.
What rights does a fair-market tenant that hits the sweet spot and obtains non-purchasing tenant status possess? Foremost, such a tenant has the right to renew the lease since a sponsor who converts pursuant to a non-eviction plan is permanently barred from evicting the tenant based upon the expiration of the tenancy. The term would be negotiated between the parties.
The tenant is also protected from being forced to enter into a lease that offers an “unconscionable rent increase.” Whether a rent is unconscionable is not measured by the size of the increase from one lease to another, but whether the proposed rent comports with what is being charged for comparable apartments. As the Appellate Term stated, “[t]he purpose of the statute was not to institute a system of rent regulation for “non-purchasing tenants but to prevent sponsors from charging these tenants above market rents as a means of forcing them out.
• Fair-market tenants whose leases expire before a condominium conversion plan is declared effective, are not protected from eviction and cannot claim the right to a renewal lease at a non-unconscionable rent.
• In order for the plan to be declared effective, there must be executed contracts for at least 15% of the units in the building from either bona fide tenants in occupancy or purchasers who represent that either they or members of their immediate family will occupy the apartment when it becomes vacant.
• For tenants who enter into fair-market leases after the plan is declared effective, far greater protection exists, at least for the present time, in the Second Department when the tenant will be safe from eviction and entitled to a renewal lease at a price comparable to similar apartments. In the First Department, there is still an ill-defined window of protection.
Of course, these rules are also subject to change by statute or, more likely, by case law. At present, the Second Department appears to be a more fertile ground for effecting a change in the rights, or lack thereof, accorded to fair-market tenants during and after the conversion process.
1. E.B. Solomont, “Conversions See New Urgency in Hot Sales Market,” The Real Deal, (November 2014), http://therealdeal.com/blog/2014/11/11/conversions-see-new-urgency-in-hot-sales-market/.
2. N.Y. Gen. Bus. Law, Art. 23-A, §§352-359-h (McKinney).
3. N.Y. Gen. Bus. Law, Art. 23-A, §352-eeee (1)(c) (McKinney).
4. N.Y. Gen. Bus. Law, Art. 23-A, §352-eeee (1)(b) (McKinney).
5. N.Y. Gen. Bus. Law, Art. 23-A, §352-eeee (2)(c)(ii) (McKinneys).
6. N.Y. Gen. Bus. Law, Art. 23-A, §352-eeee (2)(c)(iv) (McKinneys).
7. N.Y. Gen. Bus. Law, Art. 23-A, §352-eeee (1)(e) (McKinneys).
8. MH Residential 1 v. Barrett, 78 A.D.3d 99 (1st Dept. 2010).
9. MH Residential 1 v. Barrett, 22 Misc.3d 25 (1st Dept. 2008).
10. De Kovessey v. Coronet Props, 69 N.Y.2d 448 (1987).
11. MH Residential 1, 22 Misc.3d at 27.
12. N.Y. Real Prop. Act. & Proc. L. § 749(3) (McKinney 2009).
13. MH Residential 1, 78 A.D.3d at 100.
14. MH Residential 1, LLC, 78 A.D.3d at 102.
15. MH Residential 1, LLC, 78 A.D.3d at 104.
18. Full Disclosure: Adam Leitman Bailey, P.C represented one of the parties through much of the appeal process and during the trials upon remand.
19. Park West Village Assoc. v. Nishoika, 187 Misc.2d 243 (1st Dept. 2000).
20. Park West Village Assoc., 187 Misc.2d at 244.
21. Park West Village Assoc., 187 Misc.2d at 245.
23. Geiser v. Maran, 189 Misc.2d 442 (2d Dept. 2001).
24. Paikoff v. Harris, 185 Misc.2d 372 (2d Dept. 1999).
25. Paikoff v. Harris, 185 Misc.2d at 377.
26. Paikoff v. Harris, 185 Misc.2d at 378.
27. Arkansas Leasing Co. v. Gabriel, 3 Misc.3d 46 (2d Dept. 2004).
28. Arkansas Leasing, 3 Misc.3d at 51.
29. MMB Apts. v. Guerra, 45 Misc.3d 132(A) (2d, 11th, & 13th Jud. Dists. 2014).
30. MMB Apts., 45 Misc.3d 132(A) at *2.

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