Written by Michelle P. Quinn, Featured in the New York Law Journal

The burden of ameliorating New York City’s homelessness problem should not be borne by landlords alone. The time has come for the legislature to balance the impact of the housing crisis by providing funding and assistance to landlords, not just tenants.

The Housing Stability and Tenant Protection Act of June 2019 (the HSTPA) and the pandemic-related regulations created in 2020 and 2021 cast a wide net across New York fraught with knots, holes, and snags that have ensnared landlords trying to recover from three years of financial turmoil. Well-intentioned Legislative efforts to protect tenants and forestall evictions of those facing potential homelessness included inherent flaws and inconsistencies in both the wording and the application of the HSTPA, the COVID-19 regulations, and programs like the Emergency Rental Assistance Program (ERAP) and have led to Constitutional challenges and required numerous exceptions and carve-outs to be made in much of the legislation to try to mend the damage done.

The Fallout of the HSTPA

HSTPA and Rent Regulation

The HSTPA made wide-sweeping and decidedly tenant-favored changes to New York’s rent regulation program, most significantly imposing severe limitations on the amounts property owners can recover for renovation of their units and when units can be removed from rent stabilization. These drastic changes caused a group of landlords of rent-stabilized buildings to bring two separate lawsuits in New York federal courts seeking to demonstrate that restricting the income that landlords could recover from their properties was an unconstitutional burden because it hijacked their property rights. The New York federal appeals court ruled that the modifications imposed by the HSTPA are part of the risks that landlords of rent-regulated properties assume. The cases are now headed to the U.S. Supreme Court.

Ironically, while the purpose of making rent stabilization permanent was to avoid losing the stock of affordable housing, the outcome has been the opposite. Some landlords, crippled by the lack of rental income for years, have warehoused many of their apartments instead of renting them because they cannot afford to make necessary repairs or improvements to make them livable, thereby actually depleting the number of apartments available.  While courts were at a COVID-19 standstill, unavailable to landlords seeking to evict nonpaying tenants (regardless of the legitimacy of their hardship claim), landlords still faced enforcement proceedings to comply with habitability claims, often stemming from complaints made by the same non-paying tenants.

HSTPA and Cooperatives

One need only look at the language of the HSTPA to see that its primary (if not sole) intent was to apply to residential rental landlord-tenant relationships. Yet the law, as enacted, also covered tenant-shareholders in cooperatives. The adverse impact on cooperatives was not remedied until after the HSTPA had been in place for more than 2½ years. Finally, several sections of the HSTPA were modified on Dec. 22, 2021, to explicitly exclude cooperatives.    

Cooperatives are now permitted to:

1. Collect a security deposit from shareholders without limitations as to the amount, which typically occurs when consent for a financially questionable purchaser is conditioned on their posting of a significant amount of maintenance in escrow. (General Obligations Law Section 7-108)
2. Collect fees payable to managing agents or transfer agents for processing and reviewing applications from prospective tenants, as well as the actual cost of performing a background and/or credit check. (RPL Section 238-a)
3. Charge a late fee of up to 8%, with no dollar limit, if authorized by the proprietary lease or occupancy agreement. (RPL Section 238-a)
4. Recover fees, charges, penalties, and assessments in addition to rent in a summary proceeding if authorized by the proprietary lease or occupancy agreement. (RPAPL Section 702)
5. Send notice of rent defaults in the manner authorized by the proprietary leases or occupancy agreement, whether by certified mail or otherwise. (RPL 235-e) 
6. Obtain attorney fees in the event of a default judgment against a shareholder if authorized by the proprietary lease or occupancy agreement. (RPL Section 234) 

In addition, cooperatives are now not required to give 30, 60, or 90 days’ notice of non-renewal of a lease or if the rent is increased by 5% or more. (RPL Section 226-c) These corrections were made in order to recognize the unique relationships between cooperative housing corporations and their tenant shareholders while still preserving protections for both rent-regulated and traditional market-rate tenants.

However, there are exceptions to the exceptions. These modifications and exclusions do not apply to cooperatives formed pursuant to the Private Housing Finance Law, such as Mitchell-Lama Housing Companies and Housing Development Fund Cooperatives, leaving them in limbo when it comes to their treatment as cooperatives—or not. 

The Fallout of the ERAP

ERAP and Rental Tenants

The legislature enacted the provisions of ERAP in order to meet the challenges of allowing tenants and lawful occupants to remain in their homes while attempting to meet their financial obligations in paying rent during and through the pandemic period. A program fraught with problems, technical glitches, and demand far outstripping available funds, payments under the ERAP program (or lack thereof) have been the subject of numerous appeals from both the landlord and tenant sides. On the heels of the repeatedly extended eviction moratorium based solely on a tenant’s self-certifying hardship declaration, the mere submission of an application for ERAP funds by a tenant immediately freezes any eviction proceeding that a landlord has or may want to bring, with no regard for the basis for the proceeding. If a landlord believes the application to be made in bad faith or by someone clearly not eligible under the ERAP guidelines, it is incumbent on the landlord to demonstrate to a court that the stay should be lifted, causing the landlord to incur additional, potentially non-recoverable, legal fees.

In addition to the indefinite timeframe for receiving a decision, another frustrating aspect of the automatic ERAP stay (much like the automatic Hardship Declaration stay) is that in many cases the ERAP payment will not preserve a tenancy, such as when the landlord is not seeking eviction for non-payment of arrears but because of other lease defaults, or the occupant is not a legal tenant (e.g., a licensee or a squatter), or because the arrears accumulated outside of the “covered period.” Some courts have recognized this incongruity and have permitted landlords to proceed with an eviction if they show the futility of maintaining the stay. Many landlords have had no choice but to “leave money on the table” by rejecting the ERAP payment in order to simply recover possession of their premises.

ERAP and Cooperatives

A major switch occurred mid-program with the sudden exclusion of cooperative shareholders from eligibility for ERAP payments, even after significant funds had already been paid to cooperative landlords. New York City has over 328,000 cooperative apartments, with at least 85,000 limited-equity cooperatives such as Mitchell-Lama Housing Companies and Housing Development Fund Cooperatives, 75% of which are located in communities of color. The exclusion of all cooperatives has resulted in many facing serious financial trouble. 
In a legislative sleight of hand, while the HSTPA excludes all cooperatives except limited-profit cooperatives from most of its provisions, ERAP lumps them in with conventional for-profit cooperatives, even though both the HSTPA and ERAP are designed to protect limited-income individuals.

As a matter of public policy, limited-profit cooperatives should not be excluded from the ERAP program, especially since public funds are used to finance Mitchell-Lama Housing Companies. The landlord-tenant relationship existing in Mitchell-Lama Housing Companies is more similar to traditional or even rent-regulated tenancies than to private cooperative shareholders. In order to remain accessible to low- and middle-income buyers, shareholders in Mitchell-Lama Housing Companies are subject to income limitations and restrictions on the resale of shares – none of which exist in a private cooperative.  The equity recovered after the sale back to the cooperative (as required) is typically limited to the original par value of the shares, no more than a few thousand dollars. Thus, these tenants face the same financial hardship as traditional tenants. Excluding shareholders in Mitchell-Lama Housing Companies defeats the purpose of that program.

The exclusion of cooperatives from ERAP is unexplained by the legislation. This ineligibility for ERAP defies logic, especially when cooperative shareholders are treated as tenants in summary proceedings in New York courts, which can result in their eviction, just like a traditional tenant. 

Proposed Bill to Place Further Stranglehold on Landlords

Landlords, already hampered by moratoriums and stays of evictions for the last 3 years, face another legislative proposition that will further suppress a landlord’s ability to evict residential tenants for nearly half of the year. Assembly bill #4093, introduced on Feb. 9 and known as the “Winter Moratorium on Evictions Act of 2023,” proposes to freeze the execution of all warrants of eviction between Nov. 1 and April 15 each year. This plan would add to the stay imposed pending a determination of an ERAP application, as well as the court’s current discretion under RPAPL Section 749 to stay an eviction for up to a year, expanded from six months by the HSTPA. Narrowing the window within which to remove a defaulting tenant will not only deprive landlords of the ability to recover either income or their property for close to six months, but it will also lead to a tenant’s incentive to unreasonably delay proceedings in order to fall within the moratorium window.

Conclusion

The burden of ameliorating New York City’s homelessness problem should not be borne by landlords alone. The time has come for the legislature to balance the impact of the housing crisis by providing funding and assistance to landlords, not just tenants.

Michelle P. Quinn is a partner in the New York office of Gallet Dreyer & Berkey. Her practice focuses on real estate cooperative and condominium law and litigation.