Opinion ID: 6933480
Heading Depth: 2
Heading Rank: 3

Heading: The “term of the lease.”

Text: Having reaffirmed our holding in Diamond that these tenancies are subject to repudiation by the RTC, we now address one final issue — the remaining leasehold term. “Once RTC repudiates a lease, a tenant may choose to ‘remain in possession of the leasehold interest for the balance of the term of the lease_’” Diamond, 18 F.3d at 123 (quoting 12 U.S.C. § 1821(e)(5)(A)(ii)). Although the definition of “term,” like that of “contract or lease,” is a federal question, the meaning of that word is not at issue; the issue here is the substantive question of the specific time period of the term for rent-regulated tenancies. O’Melveny counsels that, where Congress has not provided a specific rule of decision, the courts should look to state law to fill in these interstices. In respect of FIRREA then, what that term is in any particular case, is a matter of contract provisions or state law. In our prior opinion, we rejected the argument of New York and the tenants that the term of a rent-regulated lease under New York law is essentially perpetual, lasting for so long as (a) the tenant continues to pay the regulated monthly rent and (b) the World War II housing crisis is perpetuated. Diamond, 18 F.3d at 123. We did so because “the power of repudiation under section 1821(e) was conferred in aid of an acute financial emergency, and cannot be construed fairly to accommodate so prolonged a residual tenancy.” Id. Moreover, we decided that we could not use New York’s “statutory occupancy rights to delimit the leasehold for FIRREA purposes” because a perpetual term might run afoul of takings jurisprudence. Id. at 123-24 (citing Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 440, 102 S.Ct. 3164, 3178, 73 L.Ed.2d 868 (1982); Block v. Hirsh, 256 U.S. 135, 157, 41 S.Ct. 458, 460, 65 L.Ed. 865 (1921)). We adhere to that view. Having held that the RTC has the power to repudiate rent-regulated tenancies, we could not permit the state to nullify the RTC’s federal power by imposing a residual lease term that runs in perpetuity; nor, for the same reason, could we accept a term measured by a tenant’s willingness to continue to pay rent (at the previous rate). The foregoing discussion of conflict preemption applies with equal force to this issue. Were the term under state law to run in perpetuity, or be subject to the will of the tenant, a situation would arise where “state law ... interferes with the methods by which the federal statute was designed to reach [its] goal.” International Paper Co. v. Ouellette, 479 U.S. 481, 494, 107 S.Ct. 805, 813, 93 L.Ed.2d 883 (1987). A perpetual lease term would cement what the RTC has determined to be a “burdensome” relationship, thereby impeding its efforts to maximize the economic return on assets. 4 Such a result is barred by the doctrine of preemption, because it “ ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’ ” Michigan Canners & Freezers, 467 U.S. at 469, 104 S.Ct. at 2523 (citations omitted). For this reason, we held in Diamond that the term of a rent-stabilized tenancy would run to the expiration of the current lease. 18 F.3d at 123. For rent-controlled tenancies, looking for the strongest analogy to a lease expiration, we held that “the lease term ends, ... on the biennial January 1 date on which the landlord next becomes entitled (following the notice of repudiation) to a review of the maximum base rent.” Id. at 124. On reconsideration, however, we have noticed a potential problem with this holding: if the repudiation occurs immediately prior to that January 1 date, the remaining lease term calculated this way could be as short as several days or weeks. This would, of course, serve the federal scheme. However, this federal scheme is displacing state laws and regulations adopted pursuant to the state’s police power. Since preemption is particularly disfavored where a state’s police power is at issue, we ought to accommodate — as best as we can— the state interest at stake. See, e.g., Cipollone, — U.S. at -, 112 S.Ct. at 2617 (‘“the historic police powers of the States [are] not to be superseded by ... Federal Act unless that [is] the clear and manifest purpose of Congress.’”) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447 (1947)). That state interest looks unfavorably upon remedies which provide for immediate eviction of the tenant. See, e.g., Manocherian v. Lenox Hill Hosp., 84 N.Y.2d 385, 395, 618 N.Y.S.2d 857, 862, 643 N.E.2d 479, 484 (N.Y.1994) (“central, underlying purpose of the [Rent Stabilization Law] is to ameliorate the dislocations and risk of widespread lack of suitable dwellings”); but see id. at 399, 618 N.Y.S.2d 857, 643 N.E.2d 479 (“another goal of the [Rent Stabilization Law] ... [is] to free up apartments, fairly and appropriately, as soon as practicable”). Fortunately, there is a close analog in state law that balances these competing objectives. In reconsidering our previous opinion, we reviewed legislation, recently enacted in New York, that implements the de-regulation of tenancies for which the monthly rent exceeds $2,000 and the annual family income of the tenant exceeds $250,000 for the two preceding calendar years. See 1993 Sess. Law News of N.Y., 216th Legislature, Ch. 253 (McKinney’s 1993) (codified at various places in N.Y.Unconsol.L., Tax L.); see, e.g., Admin.Code of City of New York §§ 26-403.1 (rent control de-regulation); 26-504.3 (rent stabilization de-regulation). This law calculates when the regulated tenancy expires, after income reporting by tenants in higher-rent dwellings and certification by the landlord to the state that the pre-conditions have been met. For rent-stabilized dwellings, de-regulation occurs “upon the expiration of the lease.” Admin.Code of City of New York § 26-504.3(b). That coincides exactly with our ruling in Diamond. For rent-controlled dwellings, de-regulation occurs “as of the first day of June in the year next succeeding the filing of the certification of the owner.” Id. at § 26-403.1. Measured from the date the tenant is required to return the income reporting form to the landlord (no later than May 31), the de-regulation of a rent-controlled tenancy occurs one year later. 5 In deference to state law (which, under O’Melveny, governs this area), we adopt this framework, which is the closest analog we find to the RTC’s repudiation of tenancies in this case.