Highlights

• New York's Housing Stability and Tenant Protection Act of 2019, which was enacted and became effective on June 14, 2019, will have a sizable impact on a landlord's ability to convert buildings to cooperatives and condominiums as well as the operation of existing cooperatives and condominiums.
• Section M refers to "all rentals" in the state of New York, and thus affects the handling of applications, credit checks and, most significantly, defaults.
• This Holland & Knight alert summarizes the relevant aspects of the new law, which impacts any landlord wanting to convert a building as well as co-op proprietary leases and subleases and leases of condo units.

New York's Housing Stability and Tenant Protection Act of 2019 (the Law), which was enacted and became effective on June 14, 2019, affects potential sponsors of cooperative and condominium offerings because the Law amends General Business Law Section 352-eeee. It also affects cooperatives and condominiums because Section M of the Law refers to "all rentals" in the state of New York. This Holland & Knight alert provides an overview of how to manage implementing the Law.

Condominium Offerings

The Law eliminates Eviction Offering Plans and requires that in order to declare a Non-Eviction Plan effective, the sponsor must have contracts to sell 51 percent of the units in the building to bona fide tenants. The Law also mandates that in addition to a 90-day exclusive right to purchase their apartments after an Offering Plan is accepted by the Attorney General, tenants must be offered a six-month right of first refusal if the sponsor is going to sell any occupied unit in the future. In addition, tenants who are over 62 years of age (the Law's definition of a senior citizen) or are handicapped who decide to not purchase their units must be offered a preferential rent for as long as they reside in the building and regardless of their wealth or income.

Existing Cooperatives and Condominiums

The Law will affect the handling of applications, credit checks and, most significantly, defaults. Of course, regardless of what the New York Legislature does, like all legislation, a great deal will also depend on how judges interpret it. One thing for co-ops to hold in mind is to keep the focus on the shares being purchased or terminated rather than the proprietary lease, which may provide some flexibility in dealing with this situation.

Before reviewing the list of issues that they will have to confront, perhaps boards and managing agents should consider eliminating proprietary leases altogether by either converting to a condominium or replacing the proprietary lease with a Shareholders Agreement, since it is difficult to consider a lease to be the appropriate document when the tenant-shareholders are the landlord.

The following is a brief summary of the relevant aspects of the Law, which presently will impact co-op proprietary leases and subleases as well as leases of condo units. Because of the direct impact on co-op boards, the information is directed to the proprietary lease, but it is equally applicable to tenant-shareholders and unit owners who are renting their apartment/units.

1. Notice of Default for Nonpayment of Maintenance: If rent/maintenance is not paid by a tenant-shareholder within five days of its due date, the co-op must give a written notice by certified mail to the tenant-shareholder. The failure to give this notice becomes an affirmative defense in a nonpayment eviction proceeding.

2. Maintenance Demand: A demand must provide 14 days' notice to cure and must be served in the same manner as the notice for landlord-tenant proceedings. This means that co-ops must now serve a notice of default by a process server. Most co-op proprietary leases now provide that notices of default can be served by Certified Mail Return Receipt Requested and require only 10 days' notice. Based on the Law, certified mailing is no longer permissible as the only means of service. Based on the requirements of the Law, the "Notice of Default" and "Rent Demand" can be combined in one form notice sent with 14 days' notice to cure and sent via certified mail and served by a process server.

3. Attorneys' Fees: When a tenant-shareholder defaults and does not show up to court for a summary proceeding, a co-op can no longer recover attorneys' fees in that proceeding, which would need to be recovered in a separate proceeding. For the time being, most co-ops can still foreclose the shares attributable to the apartment after the tenant-shareholder is evicted (or sometimes even beforehand). The Law prohibits the recovery of "fees," "charges" or "penalties" in a summary proceeding, but it is unclear whether this applies to attorneys' fees.

4. Receipts: A receipt must be given for payment made by any method other than a personal check of by a tenant-shareholder and must include the following: date, amount, identity of the property and the period for which paid, and signature and title of the person receiving the maintenance. This means that all receipts of maintenance must always be provided unless the payment is by personal check. This includes bank checks, money orders, credit card payments, auto-debits and cash. For cash payments, a board must maintain records of same for at least three years. A tenant-shareholder may request a receipt when paying by personal check, and the board must comply with this request. In addition, once the request is made (by a tenant-shareholder who pays with a personal check), the board must give receipts for personal checks for the duration of the proprietary lease (unless the tenant-shareholder states otherwise). The receipts would not be required if someone other than the tenant-shareholder pays the maintenance (e.g., if a bank pays the maintenance in a co-op, there does not appear to be a requirement to give a receipt to the bank, but there may be a requirement to give a receipt to the tenant-shareholder regarding the bank's payment). The receipt must be given within 15 days, unless payment is personally delivered, upon which the receipt must be given immediately.

5. Application Fees: The only fee permitted to be charged for the processing, review or acceptance of an application is the actual cost of a background check and credit check, or $20 cumulatively, whichever is less. Notwithstanding the foregoing, if a tenant-shareholder has a background check that the tenant-shareholder provides to the co-op dated within 30 days, no fee can be charged. A copy of the background check and a receipt or invoice from the entity conducting the check must be provided to the tenant-shareholder before the fee is received. This restriction relates to an application fee for a tenant-shareholder seeking to obtain a proprietary lease of an apartment. As such, if the co-op charges the application fee solely related to the purchase of the shares (instead of for the shares and proprietary lease), this may not be a violation of the Law. Therefore, boards should review their correspondence and forms related to the application fee and make any necessary adjustments. Please note, however, that this provision has not yet been tested by the courts. It is possible a court will find that, even if the language is changed to charge application fees solely to the purchase of the shares, that the fee really does relate to the proprietary lease as well and is not collectible.

6. Late Payment Fees: Late fees are now limited to $50 or 5 percent of the monthly maintenance, after nonpayment for five days; this is regardless of anything to the contrary stated in a proprietary lease. Proprietary leases cannot have a shorter late payment date (but can have a longer one).

7. Default in Payment of Maintenance: If a summary proceeding is commenced in court and the tenant-shareholder pays only the full maintenance due prior to the hearing in court, the summary proceeding must be discontinued. This means that the tenant-shareholder does not have to pay the legal fees incurred in connection with the summary proceeding, or the late fees or interest, in order to cause the end of the legal proceeding (which can result in their eviction). A co-op will have to bring another (i.e., a separate) proceeding to recover late fees and legal fees. Even if the co-op wins the summary proceeding, all the tenant-shareholder has to do is pay the maintenance before the sheriff or marshal completes an eviction and the eviction must be cancelled. However, as co-op has the additional remedy of a non-judicial (non-court) foreclosure proceedings.

8. Warrant of Eviction: Even after a Warrant of Eviction is issued by a court, the court may vacate the warrant if the tenant-shareholder pays the full maintenance due at any time prior to execution of the warrant. Even after the warrant is executed (i.e., the sheriff evicts the tenant-shareholder), the court still has the power to restore the tenant-shareholder to possession. The court may also stay the eviction (execution of a warrant) up to one year if the tenant-shareholder shows that they cannot find suitable housing in the neighborhood. A neighborhood is defined as the same school district (if there are school-age children) or city.

9. Holdover: In situations where there is a month-to-month tenancy, the new law provides that a co-op would have to serve a termination notice with a definite date designated in the notice, with varying notice amounts depending on the total length of time of occupancy. This must be served by a process server. The Law changes the time of service to no more than 17 days before the court date and not less than 10 days before the court date. A tenant-shareholder will also now be entitled to an adjournment of the first court appearance of the Summary Proceeding of not less than 14 days.

10. Sheriff/Marshal Notice of the Eviction: This has changed from three days (72 hours) – and six days in New York City – to 14 days. This gives the tenant-shareholder more time to pay the maintenance only and also extends the time to complete the eviction.

11. Retaliation: If a tenant-shareholder files a complaint with the board, the managing agent or governmental authority, there is a rebuttable presumption that an eviction proceeding is retaliatory if brought within one year (up from six months) from the filing of the complaint. This will impact Objectionable Conduct proceedings, so a co-op should be careful before commencing one.

12. Tenant-Shareholder's Rental History: A co-op may not deny a tenant-shareholder/prospective purchaser based upon prior court proceedings against the proposed tenant-shareholder. If a co-op reviews court records and denies an application, it is a rebuttable presumption that the co-op violated this provision. The Attorney General can enforce this provision in the Supreme Court, with a penalty of $500 to $1,000 per violation.

13. Security Deposit: Security deposits are limited to a maximum of one month's maintenance. The board may use the deposit for: a) costs reasonable and itemized due to nonpayment of rent; b) damage caused by tenant-shareholder beyond reasonable wear and tear; c) nonpayment of utility charges payable directly to the co-op; or d) moving and storage of the tenant-shareholder's belongings.

14. Death of Tenant-Shareholder: In a non-payment proceeding, co-ops may seek possession against the estate but not against occupants in the premises claiming a right to possession. A warrant is not effective against the occupants claiming a right to possession.

15. Unlawful Eviction: An unlawful eviction is now a crime as a Class A misdemeanor (punishable by up to one year in jail), and each violation is a separate offense. The civil penalty is not less than $1,000 and not more than $10,000 for each offense.