Liggett v Lew Realty LLC 2024 NY Slip Op 03378 Decided on June 20, 2024, New York Court of Appeals:
“It is well settled that an agreement waiving a benefit of the Rent
Stabilization Laws is void as against public policy. This rule is not
altered by the tenant’s status. Accordingly, the stipulation at issue
here, which required the tenant to waive his right to file a Fair Market
Rent Appeal (FMRA), is void and did not provide a path to deregulation
of the subject apartment.
Defendant Lew Realty owns and operates a Manhattan apartment building
where plaintiff K.E. Liggett has resided since October 2020 pursuant to
a market lease. Liggett commenced this action when Lew Realty attempted
to raise her rent in 2021, seeking a declaration that the apartment is
rent stabilized and she is entitled to a rent stabilized lease,
overcharges, and attorneys’ fees.
Liggett’s claim is premised on events that occurred decades earlier.
In 1984, an initial rent registration for the apartment was filed with
the Division of Homes and Community Renewal (DHCR), identifying Edward
Brown as the rent controlled tenant of record. When Brown died in
1998—the sole recorded tenant of the apartment—he paid $141.23 in rent
per month. Upon Brown’s death, Edward McKinney claimed to be Brown’s
successor to the rent controlled apartment under Braschi v Stahl
Associates Co. (74 NY2d 201 [1989]). Lew Realty disputed McKinney’s
status and commenced a holdover proceeding to evict him
McKinney and Lew Realty settled that proceeding in 2000 through a
so-ordered stipulation (“Stipulation”), which provided that McKinney
would take tenancy as the first rent stabilized tenant of the apartment
rather than maintaining the apartment as rent controlled. Rent control
and rent stabilization are both statutory mechanisms intended to “put[ ]
a brake upon run-away rent increases” in New York City, though they
operate differently (8200 Realty Corp. v Lindsay, 27 NY2d 124, 136
[1970]; see also Braschi, 74 NY2d at 208). Rent control, which applies
only to housing built before 1947, subjects rental units to “stringent
controls,” including strict limits on rent amounts and broad eviction
protections (Sullivan v Brevard Assocs., 66 NY2d 489, 492-494 [1985];
8200 Realty Corp., 27 NY2d at 129; Braschi, 74 NY2d at 209). Rent
stabilization, by comparison, gives landlords more leeway to “increase
rents within reasonable limits” (8200 Realty Corp., 27 NY2d at 136—137).
When a rent controlled unit becomes vacant, it is “automatically . . .
subject to the less rigorous provisions of rent stabilization” (Braschi,
74 NY2d at 209, citing 9 NYCRR 2520.11 [a], 2521.1 [a] [1]; see also
Sullivan, 66 NY2d at 494 [rent control governs an “ever-decreasing
number” of units]).
The Stipulation between McKinney and the landlord provided that
McKinney “agrees to accept and the landlord agrees to offer a rent
stabilized lease” in McKinney’s name at a rate of “$650 per month.” It
also stated that “$1,650 per month is a fair rent for [the] apartment
being removed from Rent Control,” a proviso apparently intended to set
the initial legal regulated rent under the Rent Stabilization Laws
(RSL). The Stipulation further provided that “[f]or as long as Ed
McKinney is the tenant, his rent shall be $650 per month plus allowable
rental increases.” The effect of that provision, which neither party
disputes, was to ensure that McKinney would pay a preferential rate of
$650, with subsequent increases tied to this number for the duration of
his tenancy. McKinney also agreed “not to challenge the rent,” thereby
waiving his right to challenge the amount of the initial rent through a
Fair Market Rent Appeal (FMRA) proceeding. Lew Realty filed the lease
with DHCR, registered $1,650 as the “legal regulated rent” and $650 as
the “actual rent paid,” and mailed McKinney notice of his right to file a
FMRA as required by statute, notwithstanding that McKinney had already
agreed not to avail himself of the process (see 9 NYCRR 2522.3
[a]).[FN1]
After McKinney vacated the apartment in 2001, Lew Realty renovated
it. Lew Realty then took the $1,650 that McKinney had agreed to in the
Stipulation (but did not pay) as the initial legal regulated rent and
applied increases tied to the vacancy and renovation, as authorized
under the RSL. It calculated that with these increases, the legal rent
would exceed $2,000, and determined that the apartment was thus subject
to luxury decontrol. Lew Realty reported the apartment to DHCR as
deregulated, and the next tenant took occupancy of the apartment at an
open market rate of $1,650 per month. The apartment has been on the open
market since.
In November 2021, Liggett brought a lawsuit alleging that the
Stipulation is void as against public policy, and that because the
Stipulation led in short order to the deregulation of the apartment, the
deregulation was invalid and the apartment remains rent stabilized. Lew
Realty moved to dismiss, contending that the Stipulation is enforceable
and the deregulation proper. Supreme Court denied the motion, holding
that the Stipulation is unenforceable to the extent that it waives the
protections of the rent laws.
The Appellate Division reversed and dismissed the complaint (211 AD3d
473 [1st Dept 2022]). Relying on Kent v Bedford Apartments Co. (237
AD2d 140 [1st Dept 1997]), the court concluded that although an
agreement by a tenant to waive the benefit of any provision of the rent
control law is void, this protection did not apply to McKinney because
he was not an established tenant when he signed the Stipulation. The
Appellate Division also concluded that because Liggett’s claim
implicates how rents are set, it is akin to an FMRA and therefore barred
by the statute of limitations (see 9 NYCRR 2522.3 [c]). Two Justices
dissented, concluding that the Stipulation is void because it undermines
the statutory process for setting initial regulated rents by ensuring
McKinney would have no incentive to challenge the higher legal rent, and
by requiring him to affirmatively waive his right to file an FMRA.
We now reverse.
ew York’s Administrative Code provides a specific process for setting
the initial rent of an apartment leaving rent control and entering rent
stabilization. Under 9 NYCRR 2521.1 (a), the initial regulated rent
“shall be the rent agreed to by the owner and the tenant and reserved in
a lease or provided for in a rental agreement subject to [*2]the
provisions of this Code, and subject to a tenant’s right to a Fair
Market Rent Appeal to adjust such rent pursuant to section 2522.3 of
this Title.” The right to file an FMRA is held only by the first tenant
of a rent stabilized apartment, so long as that tenant received mailed
notice of this right (see 9 NYCRR 2522.3 [a]).
The Code does not allow for waiver of its statutory protections. It
expressly provides that “[a]n agreement by the tenant to waive the
benefit of any provision of the RSL or this Code is void” (9 NYCRR
2520.13; see also 9 NYCRR 2200.15 [“An agreement by the tenant to waive
the benefit of any provision of the Rent Law or these regulations is
void”]).
The right to file an FMRA is one such “benefit . . . of the RSL.” As
with all of the RSL’s protections, this right is meant “not to protect
just a tenant, but to ensure the viability of the rent regulation system
which protects tenancies in general, provides predictability to
landlords, and significantly enhances the social, economic and
demographic stability of New York City” (390 W. End Assocs. v Harel, 298
AD2d 11, 16 [1st Dept 2002]). The availability of an FMRA provides a
crucial check on the initial rent for a rent stabilized apartment.
Because that amount serves as the baseline against which subsequent rent
increases are calculated, it can affect the apartment’s subsequent
status and in turn, the overall stock of rent stabilized apartments in
New York City.
By securing McKinney’s explicit agreement “not to challenge the
rent,” the Stipulation waived his right to file an FMRA. That bargain
circumvented the statutory process, and consequently the Stipulation is
void in its entirety as a matter of law (9 NYCRR 2520.13; see also
Jazilek v Abart Holdings LLC, 10 NY3d 943, 944 [2008]; Riverside
Syndicate, Inc. v Munroe, 10 NY3d 18, 22 [2008]). Because the
Stipulation is void, Lew Realty’s registration statement based on the
Stipulation is as well, and therefore “neither party is entitled to rely
on it” (id. at 24) and it cannot serve as the basis for deregulation.
It remains to be determined whether the apartment was properly
deregulated on some other ground.
In concluding otherwise, the Appellate Division majority relied on
Kent v Bedford Apartments Co., which held that the RSL’s prohibition of a
waiver of rights did not apply to a plaintiff not yet established as a
rent stabilized tenant (237 AD2d at 140). Kent, however, is inconsistent
with our subsequent case law. In Riverside Syndicate, we examined an
agreement whereby tenants “waive[d] all right to challenge the legality
of the rent” and agreed to pay more than the allowable amount, in
exchange for impermissibly retaining a rent stabilized apartment under
circumstances barred by the RSL (10 NY3d at 21). We held the agreement
was “on its face” a pact to ” ‘waive the benefit’ of rent
stabilization,” and “therefore void” (id. at 22). Notably, the tenants
in Riverside were not tenants of record, and their settlement, which was
so-ordered by the court, resolved a holdover proceeding (id. at 23). We
confirmed this point in Jazilek, overturning an Appellate Division
decision that relied on Kent and holding that “[a]lthough tenant was not
‘of-record’ upon entering . . . the so-ordered stipulation violat[ing]
the Rent Stabilization Code,” nonetheless the agreement was “void as
against public policy” (10 NY3d at 944; see also 390 W. End Assocs., 298
AD2d at 14 [enforcing settlements that contravene the RSL “would
essentially allow any landlord to evade rent regulations by the mere
expedient of a private agreement”]).
Kent is in direct tension
with our holdings in Jazilek and Riverside, and we clarify that it is no
longer authoritative. Contrary to Kent’s conclusion, McKinney’s status
vis-à-vis the apartment has no bearing on whether the Stipulation was
void. Rather, the Stipulation is void because it purports to waive a
benefit of the rent laws. Accordingly, Kent provides no basis to dismiss
Liggett’s claims here. For the same reasons, the Stipulation is not
enforceable simply because it resolved a dispute between McKinney and
Lew Realty and may have inured to McKinney’s benefit (see e.g.
Riverside, 10 NY3d at 21-22; Drucker v Mauro, 30 AD3d 37, 38 [1st Dept
2006] [“an agreement in purported or actual settlement of a
landlord-tenant dispute which waives the benefit of a statutory
protection is unenforceable as a matter of public policy, even if it
benefits the tenant”]).[FN2]
Nor does the statute of limitations require dismissal of this action.
Such a bar “does not make an agreement that was void at its inception
valid by the mere passage of time” (Riverside, 10 NY3d at 24; see also
Thornton v [*3]Baron, 5 NY3d 175, 181 [2005] [lease “(r)eflecting an
attempt to circumvent the Rent Stabilization Law in violation of the
public policy of New York . . . was void at its inception”]).
In sum, despite concerns about the substantial delay between the
Stipulation’s execution and this litigation’s commencement, no statute
of limitations bars plaintiff’s claim that the apartment is subject to
rent stabilization. We hold that the Appellate Division erred in
concluding otherwise and in deeming Liggett’s complaint untimely. On
remand, Lew Realty may rely on other reasons, apart from the
Stipulation, to establish that the apartment was not rent stabilized
when Liggett took tenancy, such as by establishing the fair rent of the
apartment when it first entered rent stabilization in 2000 and applying
subsequent allowable increases pursuant to the rent history (see e.g. 9
NYCRR 2522.4; 2522.8). We do not address any issue related to Liggett’s
rent overcharge claims, as those issues are not before us (see Matter of
Regina Metro. Co., LLC v New York State Div. of Hous. & Community
Renewal, 35 NY3d 332, 351 n 4 [2020]).
Accordingly, the judgment appealed from and the Appellate Division
order brought up for review should be reversed, with costs, and
defendant’s motion to dismiss the complaint denied.
Judgment appealed from and Appellate Division order brought up for
review reversed, with costs, and defendant’s motion to dismiss the
complaint denied. Opinion by Judge Halligan. Chief Judge Wilson and
Judges Rivera, Garcia, Singas, Cannataro and Troutman concur.
Decided June 20, 2024
Footnotes
Footnote 1: Though Lew Realty filed the initial rent as required, there
was no litigated proceeding before DHCR, and Lew Realty does not invoke
collateral estoppel here (cf. Gersten v 56 7th Ave. LLC, 88 AD3d 189,
201 [1st Dept 2011]).
Footnote 2: While the Rent Stabilization Code authorizes a tenant to
withdraw a complaint where there is “a negotiated settlement between the
parties and with the approval of the DHCR, or a court of competent
jurisdiction, or where a tenant is represented by counsel” (9 NYCRR
2520.13), McKinney did not file a complaint with DHCR.”