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Battle Between NYC and Airbnb Resumes

Since 2010, renting out apartments in multiple dwelling for a term less than 30 days has been illegal in New York State under § 4 of the New York Multiple Dwelling Law (the “N.Y. Mult. Dwell. Law”).  As discussed in our December 20, 2016 post “Airbnb Settles with New York State: New Developments in Short-Term, Rental Law,” in 2016, Airbnb challenged a new provision added to the short-term rental law, § 121 of the N.Y. Mult. Dwell. Law, which levied fines for posting advertisements for apartment rentals under 30-days. Airbnb challenged the new provisions because the law did not clearly identify who would be fined for violations of the law. The lawsuit settled after the NY Attorney General’s office clarified that the fines would not be levied against companies such as Airbnb who are merely hosting sites for rental posting and that, instead, the fines would be imposed against hosts who post short-term rental listings.

Airbnb’s battle in NY was recently reignited. On August 6, 2018, Mayor de Blasio signed into law an amendment to NYC’s Administrative Code that requires accommodation booking service companies, like Airbnb, to report the names and addresses of the hosts using their sites to the NYC Office of Special Enforcement (the “OSE”) every month; refusal to comply could result in civil penalties. The law is aimed at facilitating the OSE’s efforts to catch individuals who violate § 121 of the N.Y. Mult. Dwell. Law.  While Airbnb is still considering its options for challenging the new law enacted on August 6th, Airbnb is already challenging the scope of a subpoena served by NYC in connection with an existing short-term rental dispute. The subpoena requires Airbnb to turn over host and guest information for the last seven years in relation to NYC’s ongoing lawsuit against Big Apple Management, who allegedly illegally converted apartments into short-term rentals for tourists in seven of its buildings.

Unless Airbnb successfully challenges the latest amendment to the NYC’s Administrative Code, we can expect the OSE to take more aggressive efforts to curtail illegal short-term leasing by requiring Airbnb and similar companies to provide host information to facilitate enforcement. NYC landlords and co-op and condo boards can file a complaint with the OSE through NYC 311 by phone or online if there is suspected illegal short-term leasing activity in their buildings.  

This article was co-authored by Dominique Miller and Stephen M. Lasser, Esq.

Commercial Leasing

Protecting Commercial Landlords Before and After Tenant Bankruptcies

An issue that commercial landlords frequently have to address is tenants falling behind in their rent payments and then filing for bankruptcy protection.  Once a tenant declares bankruptcy, an “automatic stay” goes into effect, which makes it illegal for the landlord to pursue eviction and collection efforts against the tenant except through the channels available through the tenant’s bankruptcy court proceeding.[1] This is problematic because the landlord loses rental income and is also prevented from evicting the tenant and re-letting the space to a solvent tenant.  As a result, it is critical for landlords to take proactive measures prior to a faltering tenant declaring bankruptcy, as well as taking aggressive measures within the bankruptcy proceeding to minimize the potentially negative effects of bankruptcy.

 

SECURITY DEPOSIT MANAGEMENT

Standard commercial leases contain provisions that require tenants to deposit money with landlords as security for the tenant’s performance of the terms and conditions of the lease, including the payment of rent.  The amount of security deposits vary, but they are usually equivalent to several months’ rent.  Although security deposits are seemingly simple safeguards, unfortunately, they are sometimes not utilized to their maximum effect.

First, it is critical that at the time of a lease renewal that the amount of the security be increased to be commensurate with a multiple of the new presumably increased monthly rent and that such increased amount is actually collected. A security deposit collected 5, 10 or 20 years ago will probably not offer a landlord adequate protection for a current rent default.

In addition to making sure that security deposit amounts are up to date, it is also critical that landlords do not delay in applying security deposits against rent arrears.  Although a landlord may hope that a tenant in arrears will eventually get current in its rent payments again, if a landlord delays giving notice to the tenant that it is applying the tenant’s security against a tenant’s rent arrears and fails to make such application prior to the tenant declaring bankruptcy, then the security deposit will become part of the bankrupt tenant’s bankruptcy estate and might not ever be collected by the landlord.  This is because many commercial tenants who declare bankruptcy owe debts to other creditors such as lenders or equipment lessors who are typically secured creditors and would receive repayment priority over landlords whose rent claims are typically unsecured.  Unfortunately, in many bankruptcies there is not enough money to pay the debts of unsecured creditors after the secured creditors have been paid.  As a result, it is a good practice for landlords to ensure that tenant security deposits are always kept current and that landlords do not delay in applying security deposits against rent arrears in order to protect themselves.

 

USING LETTERS OF CREDIT INSTEAD OF CASH SECURITY DEPOSITS

Letters of credit are an attractive alternative to cash security deposits that landlords can use to secure a tenant’s payment obligations under a commercial lease.  The main benefit to landlords is that if a tenant declares bankruptcy, the proceeds of a letter of credit do not become part of the tenant’s bankruptcy estate, and the landlord can collect these funds without violating the automatic stay.[2]

A letter of credit is typically a short two or three page agreement whereby the issuing bank agrees to pay an amount specified in the letter of credit to the beneficiary (landlord)  upon a default by the applicant (tenant) under the lease between landlord and tenant, and the landlord subsequently delivering a payment demand known as a “draft” to the issuing bank.

From a landlord’s perspective, one downside of using a letter of credit is that it may take more than a week for an issuing bank to release funds in contrast to a cash security deposit held in an account controlled by the landlord, which would be more easily accessible.  In addition, issuing banks can be extremely particular and demanding in regard to the manner and format in which the draft and related documents must be presented by landlord in order to draw on a letter of credit.  However, as long as a landlord or its legal counsel is experienced and meticulous when attempting to draw on a letter of credit, the potential inconvenience should be more than offset by the bankruptcy protection that a letter of credit can provide.

 

EXPEDITED LEASE REJECTION

Once a commercial tenant declares bankruptcy, the court appointed bankruptcy trustee has 120 days to decide whether to accept or reject or the lease which leaves the space in a no-man’s land in the interim because the landlord cannot legally relet the space until the lease is rejected.  However, unless the tenant filed a Ch. 11 reorganizational bankruptcy and intends to continue to operate its business out of the space on an ongoing basis or the trustee believes that the lease is valuable and could be sold in order to generate income for the bankruptcy estate to pay off other debts, in most cases the lease will eventually be rejected by the trustee.

As a result, it is usually a good strategy for landlords to have their legal counsel promptly contract the bankruptcy trustee and tenant’s bankruptcy counsel to try to obtain an expedited rejection of the lease in less than 120 days.  This voluntary lease rejection would be embodied in a written agreement, which would have to be approved by the trustee, and whereby the tenant will also surrender possession of the leased space to the landlord, so the locks to the space can be changed and the space can be relet.   This agreement would also address the disposal of any other property left in the space, which might be encumbered by the liens of other creditors.  If a landlord fails to take proactive steps to expedite a lease rejection, such landlord may be sitting with a fully or partially empty space for a long time.

 

LANDLORD’S UNPAID RENT CLAIMS

In addition to attempting to expedite the rejection of a bankrupt tenant’s lease and the surrender of the leased space back to the landlord, landlord’s legal counsel should also submit a proof  of claim with the bankruptcy court for all unpaid pre-bankruptcy petition rent and post-bankruptcy rent owed by the bankrupt tenant to the landlord.  Pre-petition unpaid rent would be classified as unsecured debt, which is given the lowest payment  priority in bankruptcy.  Generally, a landlord’s claim for post-petition rent that accrued prior to the lease rejection would be considered an administrative claim under the Bankruptcy Code, which would be given higher payment priority than unsecured debt, but would still be behind secured creditors.  Lastly, landlord’s legal counsel could file a proof of claim for an unsecured claim for “rejection damages” for the balance of the rent that would have been due under the lease “post rejection” in an amount equal to the greater of one year’s rent or fifteen percent of the rent due for the balance of the lease (not to exceed three years).

In conclusion, there are many proactive measures that landlords can take prior to and after a commercial tenant declares bankruptcy in order maximize the collection of rent and expedite the vacatur and reletting of the bankrupt tenant’s space.

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Law Requiring Notice of Interested Transactions Amended to Cover Condominium Boards

As you may recall from one of our previous newsletters, a new New York State law was enacted, effective January 1, 2018, which requires cooperative board members involved in interested transactions to provide disclosure of these transactions to the owners in their associations. (Here is a link to the previous newsletter https://lasserlg.com/new-disclosure-requirements-board-members/ )

On April 18, 2018, Governor Cuomo passed an amendment to this new law specifying that the law also covers condominiums. Although the wording of the April 18, 2018 amendment probably should have been more detailed, it seems clear that the intent of the law is to require condominium board members to disclose to the condominium’s unit owns on an annual basis whether any board members have engaged in interested transactions with the condominium. An interested transaction is a contract or business transaction with the condominium association in which a board member has a substantial personal financial interest. (E.g., a board member’s contracting company doing work for the condominium association.) We recommend that condominium board members and property managers consult with legal counsel to ensure compliance with this new law.

(Note: although the BCL and NPCL generally only apply to cooperatives and homeowners’ associations, it would be prudent for boards of unincorporated condominiums to follow the same procedures.) The responsibility for compliance with these new legal requirements falls upon the association. Therefore, as a practical matter, managing agents and board presidents should try to ensure compliance by their associations.

In order to comply with these new legal requirements, at least once each year the association must:

  1. Provide a copy of BCL Section 713, http://codes.findlaw.com/ny/business-corporation-law/bsc-sect-715.html (or NPCL Section 715, if applicable, http://codes.findlaw.com/ny/notforprofit-corporation-law/npc-sect-715.html) to each board member. (Practice Tip: each board member should be required to sign a form stating that he or she received a copy of the statute at the time it is distributed.)
  2. Provide an annual report to all owners that lists all contracts voted upon by the board which involved an interested board member or a report stating there were no interested contracts voted upon by the board. The annual report must include the following information for each specific contract that involved an interested board member:a. A description of the work or services being performed, information on the contract recipient, and the amount and purpose of the contract;b. A list of all meetings held by the board to discuss or vote on the contract, including board member attendance, how each board member voted, and the results of the vote; andc. The date the contract would be and remain valid.

    d. Each board member must sign the annual report.

    e. If during the year there were no contracts voted upon which involved an interested board member, the board members must all sign and send to all owners a disclosure statement stating that “No actions were taken by the board that were subject to the annual reporting requirements pursuant to Section 727 of the BCL (or Section 715 of the NPCL).”

One practical way to comply with these new disclosure requirements would be to distribute the annual report together with the annual meeting notice which is sent to all owners each year prior to the association’s annual meeting.

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Unpaid Condo Common Charges on Credit Reports

Approximately one year ago, a data aggregation company based in California named Sperlonga entered into an agreement to start providing condominium and HOA owner payment and account status data to the credit reporting company Equifax.  It is our understanding that Sperlonga charges a monthly flat fee to the condominium or HOA for this service or a fee based on the number of account delinquencies it reports to Equifax.

As many property managers and board members know from first-hand experience, due to the weak NY laws governing condominiums and HOAs, collecting common charge payments can be an expensive and frustrating process.  Until approximately one year ago, it was not possible to report common charge delinquencies on a credit report until there was legal action and a judgment obtained.  Now delinquent owner accounts can be included on credit reports approximately 60 days after payments are past due.  In addition to adversely affecting owners who do not pay their common charges on time, if a condominium or HOA enrolls all of its units into this program, not just the delinquent ones, then the owners who pay on time should have their credit ratings enhanced.

It appears that one reason that this technology has not been utilized much in NY yet is because many  NY management companies use different bookkeeping software programs than those that are used in other parts of the country where this service has been popular.  As a result, the new technology cannot interface with the NY management companies’ bookkeeping software.  Because property management bookkeeping software is expensive and difficult to change, this new technology may not catch on in NY until there are some technological advances.  Additionally, there are some related Debtor and Credit law issues that will probably get worked out in other states first, which will hopefully enable NY condominiums and HOAs to eventually implement this technology free of any legal challenges and less potential liability.

(Disclaimer: This article is not intended to provide legal advice or to explain the intricacies of this new technology.  If you are interested in this new technology, you should direct inquiries to the service providers.)

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Late Payment of Common Charge Fees by Delinquent Unit Owner Deemed to Be an Admission of Liability: Condo Board Entitled to Recover Late Fees and Legal Fees

Landlords and condominium boards frequently have to sue tenants and unit owners who fail to pay their rent or common charges in a timely manner.  This is an unfortunate fact of life in the real estate world.  In these situations, courts have typically been very stingy when awarding late fees or legal fees to the landlord or condominium board even though the language in the lease or by-laws the lawsuit is predicated upon requires the delinquent tenant or unit owner to pay late fees and reimburse the landlord or condominium board for the legal fees incurred commencing and adjudicating the lawsuit.

In these types of lawsuits, the delinquent tenant or unit owner often pays all base rent or common charges owed just prior to eviction or foreclosure, and then the presiding judge typically strongly encourages the parties to settle and asks the landlord or condominium board to waive late fees and to accept less than half the legal fees owed.  In these situations, if the landlord or condominium board refuses to settle, the judge may end up awarding much less than half of the late fees and legal fees.  This is not a fair result for the landlord or condominium board because it basically results in an interest free loan to the delinquent tenant or unit owner and encourages untimely payment and litigation.

In 2016 (technically December 15, 2015), this office won an appeal that appears to be a game changing decision for condominium boards dealing with this issue.  (Sorry, the decision only applies to condominiums boards not landlords.)  In the case Board of Managers of One Strivers Row Condominium v. Giwa, 134 A.D.3d 514 (1st Dept. 2016), the Appellate Division, First Department ruled that payment of common charges by a delinquent unit owner after a condominium board has commenced legal action against such owner is an admission of liability, which entitles the condominium board to collect late fees and legal fees under such circumstances.  Specifically, the court determined that $42,037.32 in late fees and legal fees was “supported by the record and is not unreasonable.”  This is a departure from prior case law where typically courts have only awarded a clear winner legal fees at the bitter end of a knock-down, drag-out lawsuit.  In the Board of Managers of One Strivers Row Condominium case, the appellate court is stating clearly that the fact that the condominium board even had to commence litigation to collect payment was a sufficient basis to entitle the condominium board to the recovery of late fees and legal fees.

In sum, the new precedent established by this appellate court decision should save condominium boards and their associations thousands of dollars by forcing unit owners to pay on time or suffer the consequences of having to pay the condominium board late fees and legal fees if a lawsuit is commenced.  If a lower court tries to force settlement on these items, there is now a binding appellant precedent, which holds that these items must be paid by the delinquent owner.

 

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Payment Required to Enter Your Neighbor’s Property: New Case Law Precedent Established

More and more buildings are added to New York’s skyline each year.  Frequently, it is impossible for a new construction project or building-wide gut rehabilitation to be completed without the owner who is performing the construction entering upon an adjoining owner’s property.  New York has had a statute in effect since 1968, which addresses the situation where adjoining owners cannot amicably arrange construction access: New York Real Property Actions and Proceedings Law §881 (hereafter referred to as “RPAPL §881”).  A recent appellate court decision has interpreted RPAPL §881 broadly to require the encroaching owner who seeks access to pay fees to the owner of the encroached upon property, even though the statute makes no mention of fee reimbursement.

The original purpose of RPAPL §881 was to provide a legal basis for an owner who could not obtain consensual access to an adjoining owner’s property for the purpose of making improvements or repairs on his or her own property to obtain court ordered access.  The statue provides a specific mechanism for filing a lawsuit and authorizes the courts to grant an access license to the encroaching owner “in an appropriate case upon such terms as justice requires.”  Although the statute is silent on the issue of whether the encroaching owner should have to reimburse the burdened owner for fees incurred as a result of the encroachment, the Appellate Division, First Department recently awarded both license fees and attorneys’ fees to an owner that was sued and compelled to provide an access license to its property during its adjoining neighbor’s construction project.

Are You Kidding Me?! I Have to Pay My Neighbor’s Fees?!

Although some lower court decisions granted license fees and attorneys’ fees to encroached upon property owners, there was no appellate authority awarding such fees until April 2016.  In the case DDG Warren LLC v. Assouline Ritz 1, LLC, 138 A.D.3d 539 (1st Dept. 2016), the Court awarded license fees and attorneys’ fees to the encroached upon property owner because the access license would “substantially interfere with the use and enjoyment” of the property, thus decreasing its value during the adjoining owner’s construction.  The Court also stated that “[e]quity requires that the owner compelled to grant access shall not have to bear any costs resulting from the access.”

Each access case is very fact specific, so although the decision in the DDG Warren LLC case creates a new appellate precedent regarding payment of license fees and legal fees, the real take away from the DDG Warren LLC case is that courts have broad powers to impose license access terms between adjoining property owners.  If you need access to your neighbor’s property, you should try to work out reasonable voluntary access agreement terms before you sue your neighbor under RPAPL §881 because you may not like the terms and fees imposed by a court.  And on the flip-side, if your adjoining neighbor requests access to your property, do not expect him or her to write you a blank check.  In sum, try to cooperate with your neighbors—the shoe usually ends up on the other foot over time.

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Airbnb Settles with New York State : New Developments in Short-Term Rental Law

Airbnb is a global technology company with huge revenues that facilitates apartment rentals by owners and tenants to third parties, often tourists, on a short-term basis.  Airbnb reached a settlement with New York State earlier this month, which dropped the lawsuit Airbnb brought challenging a new law that went into effect in October 2016, which would have levied fines from $1,000.00 to $7,500.00 for advertising apartment rentals under 30 days in length. Although short-term apartment rentals have been illegal in New York since 2010, Airbnb has continued to operate in a grey zone because enforcement has proven to be difficult. The new law was intended to curtail use of Airbnb and similar apartment sharing websites by issuing fines when short-term rentals were advertised.

Airbnb responded to the new law by filing a lawsuit and arguing that the language of the new law was unclear about who the fines would target, Airbnb or the platform’s hosts who rent out their apartments.   In addition, Airbnb argued that the new law violated the Federal Communications Decency Act of 1996, which protects internet publishers of third party content from liability.

Airbnb dropped the lawsuit after settlement discussions with the NY Attorney General’s office clarified that the new law would seek to issue fines against apartment dwelling hosts and not companies like Airbnb who only publish rental postings.  Although the lawsuit was settled, enforcement of the new law is still is still an open question.  Currently, in large cities such as NYC, the mayor’s office is tasked with enforcement of the law locally, but due to limited resources it remains to be seen whether the new law, which fines apartment hosts, will have a significant impact on governmental regulation of short-term rentals.

However, most residential leases and many cooperative proprietary leases and condominium by-laws already prohibit short-term rentals and these documents also often prohibit illegal activity.  As a result, the October 2016 amendment of the short-term rental law has created a new category of illegal activity “advertising short-term rentals,” which landlords and boards can use as a basis to commence legal action to help eliminate short-term rentals even if NY State and local government agencies do not actively enforce the new law.

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Commercial Leasing

Commercial Leasing and the “Good Guy” Guaranty

Like other business negotiations, commercial lease negotiations depend on market conditions and the bargaining strength of the parties to the transaction (i.e., the landlord and tenant). Unless a commercial tenant is a bank or fortune 500 company, most landlords require new tenants signing a lease to deposit a sum of money equal to several months rent as a security deposit or that the tenant deliver a letter of credit in lieu of a cash security deposit.

In addition to posting a security deposit, some landlords require that a principal of a corporate tenant without a long track record sign a good guy guaranty. (For example, a hedge fund manager who is one of our clients recently opened a new office for a new fund he formed and the landlord required him to sign a good guy guaranty.) In its most basic form, a good guy guaranty is a personal guaranty for the payment of rent that remains in effect as long as a tenant remains in the rented space.

Similarly to other personal guaranties, a good guy guaranty protects landlords in situations where a corporate tenant stops paying rent by making a principal of the corporate tenant personally liable for the unpaid rent. However, a good guy guaranty is less onerous for tenants than an unlimited personal guaranty because the tenant has the ability to be a “good guy” and vacate the space if the tenant’s business is struggling and thereby eliminate the personal liability of the principal who signed the good guy guaranty. This benefits the landlord too because the landlord can re-rent the space rather than having to commence a non-payment eviction proceeding in housing court, which can often drag on for several months.

Although conceptually in its basic form a good guy guaranty is straight forward, the scope of a good guy guaranty can be expanded to include non-monetary defaults and may even require a tenant to be paid up to date in rent in order for the tenant to have the right to turn over the space to the landlord and have the principal’s personal liability extinguished. In sum, the form of good guy guaranty used for a particular lease transaction varies and will depend on the bargaining strength of the parties as well as their knowledge and the advice they receive from legal counsel.

If you would like to know more about this posting and commercial leasing, please contact Stephen M. Lasser.

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