BBG News

The Law of Unintended Consequences
(The Impact on Co-Ops and Condos of the 2019 Rent Laws)

Jun 24, 2019

The Housing Stability and Tenant Protection Act of 2019 (the “Act”), which was signed into law by Governor Cuomo on June 14, has triggered widespread criticism from many owners of rental buildings, and dire predictions of significant negative impact on various aspects of the New York City economy. I will defer to others on those issues.

However, the Act also includes four provisions which could have a huge, but apparently unintended, negative effect on co-op (and, to a lesser extent, condo) management and operations.

First, the Act includes a new Real Property Law section 227-f, which bars a “landlord of a residential premises” from refusing to rent or offer a lease to a potential tenant on the basis that (s)he was involved in a past or pending landlord/tenant litigation. Worse, the law states that a rebuttable presumption of a violation will exist if information was requested from a tenant screening bureau and the requester subsequently refuses to rent or offer a lease to that applicant.

This new law could easily be applied to co-ops in connection with their screening of potential purchasers—-past litigation is a common area of inquiry in co-op Board applications, and many Boards decline consent to prospective purchasers who have been litigious elsewhere. The new law would prohibit that practice, and could subject co-ops (and individual Board members?) to civil fines for doing so. Co-op and condo apartment owners seeking to sublease their apartments could also find themselves subject to the new law if they refuse to rent to a tenant with a litigious background; to the extent that such buildings’ managing agents participate in processing such subleasing applications, they could also find themselves indirectly liable for any violations by the apartment owners.

The second area of concern is a new Real Property Law section 238-a, which bars a “landlord, lessor, sublessor or grantor” from demanding any late fee in excess of $50, or 5% of the monthly rent, whichever is less.

This statute could also be applied to co-ops, and could stop them from charging their standard late fees, which typically far exceed $50/month. Co-op shareholders who habitually pay their maintenance late could take advantage of the new law, and use the co-op—-and the new law–to “finance” their cash flow needs elsewhere. Once again, co-op and condo apartment owners who sublease their apartments would also be blocked by the new law from charging truly disincentivizing late fees.

Third, the new Real Property Law section 238-a also bars a “landlord, lessor, sublessor or grantor” from demanding any fee or payment in excess of $20 for processing a tenancy application—-and must waive even that paltry fee unless a copy of the background check report is supplied to the applicant.

Most co-op application fees run into the hundreds of dollars, if not more. While such fees are most often paid to the co-op’s managing agent (and not to the co-op itself), query whether an argument could be made that the managing agent is merely performing a ministerial task on behalf of the co-op Board, and should thus also be barred from charging more than $20. A condo, being an amalgamation of real estate owners and not a “landlord, lessor, sublessor or grantor”, would ostensibly not be subject to this new restriction, at least as currently drafted. However, once again, co-op and condo apartment owners who charge their tenants processing or application fees for subleases could be caught in this net as well; and, again, to the extent that such buildings’ managing agents process such applications, the managing agents could also find themselves subject to the new prohibition, and indirectly liable for any violations.

Finally, the Act also amends General Obligations Law section 7-108, dealing with tenant security deposits, to now provide that “no deposit or advance shall exceed the amount of one month’s rent under such contract”. While the apparent intent of the amendment, and its context, were probably not meant to apply to co-ops and condos, the language is still broad enough to include them in its reach. Many co-op Boards condition consent to a purchaser with iffy financials on his/her depositing a large sum in escrow, typically equal to one or two years’ maintenance for the apartment, to secure the purchaser’s payment obligations to the co-op. In addition, many co-op and condo apartment owners who lease out their apartments at market rates typically require a security deposit equal to two or more months’ rent.

The new statute would technically bar both of these activities. Ominously, the amended statute now provides that willful violation of this law could subject the violator to punitive damages equal to twice the amount of the deposit or advance taken. Thus, a co-op Board that requires a purchaser to make an escrow deposit of, say, $50,000 could theoretically be liable for punitive damages of $100,000. Will fear of violating the amended statute lead to more Board turndowns and, consequently, less flip tax revenue to co-ops and lower transfer tax revenue to the City and State? Can co-op Boards get around the new law by requiring straight pre-payment of one or two years’ maintenance in lieu of an escrow deposit? Or will the bar on an “advance” in excess of one month’s rent close off that possibility as well?

In addition to the above, the Act also imposes various new procedural hurdles for a landlord seeking to commence litigation against a tenant in Housing Court. These will impact co-ops as well, but not as significantly and regularly as those discussed above.

It would appear that the legislature’s zealous desire to effect certain changes with regard to the rental industry could very well have extremely significant spillover effects on co-op and condo management and operations. Further refinement by the legislature and the Courts is needed, desperately and fast.

Aaron Shmulewitz heads the firm’s Co-op/Condo practice.

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