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Monday, February 11, 2008

Contracting Around Rent Stabilization: Void Ab Initio

Nyc_skyline_thumb Riverside Syndicate, Inc. v. Munroe is a recent (2/7/08) New York Court of Appeals decision that provides a nice example of a contract that is against public policy. 

Tenants leased three rent-stabilized apartments that were apparently combined into one unit.  One of those apartments was originally subleased by the tenants - and the landlord brought an eviction proceeding, claiming the sublet was illegal.  In order to settle the eviction proceeding, the tenants and the landlord agreed that the tenants "shall be recognized as the lawful, rent stabilized tenants of the subject premises at a monthly rental rate of $2,000."  This monthly rent was well above the maximum amount allowed under rent stabilization laws (according to the landlord, the maximum rent at the time would have been $1325; the tenants suggested a lower amount).  As part of this settlement, the tenants waived the right to challenge the legality of the rent and agreed that, if the apartments were deregulated, the landlord would offer a 2-year renewal lease with a maximum rent increase of 8%.  In 2000, the apartments were deregulated.  Things were fine until 2003, when the landlord began eviction proceedings based on the claim that the tenants were not using the apartments as their primary residence.  The landlord sought a declaratory judgment that the settlement agreement was void as against public policy.

Rsmith04The Court unanimously held that the agreement was against public policy.  The Court held that the agreement was, on its face, a waiver of the benefit of rent stabilization and, therefore, void.  Judge Smith wrote:

Such an agreement allows a tenant who already has one home, and who is able to pay more than the legal rent for a second one, to use the law as a means of getting that second home in perpetuity at a bargain price. * * * [T]o countenance such an arrangement would violate the fundamental policies and purposes of the statutory rent regulation scheme.

What is the net result?

The agreement is void as to both parties, and neither party is entitled to rely on it.  The tenants may well have a strong claim, subject to any statute of limitations defense that may exist, to recover the excess rent they paid; they may also have a strong claim to rescind the deregulation of the apartments, if that deregulation was the result of the illegal agreement.  We do not prejudge these claims except to say that, having successfully argued that the agreement was void at inception, the landlord may not invoke the agreement in its own defense.

Casting aside any policy debates about the propriety and effectiveness of rent stabilization laws, it seems like this is a reasonable and uncontroversial result.  Judge Smith seems to hit the nail on the head: "Agreements like the one at issue here distort the market without benefiting the people the rent stabilization laws were designed to protect." 

[Meredith R. Miller]

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