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BLOG / 07.15.19 /Kenneth R. Jacobs

How the “Tenant Protection Act” Affects Co-ops and Condos: Limits on Late Fees; Recovery of Expenses in Evictions; Timetables to Cure Defaults; Ban on Escrows for Maintenance; Limits on Application Fees Charged by Managing Agents

The newly passed “Housing Stability and Tenant Protection Act of 2019” (the “ TP Act ”) makes sweeping changes expanding tenant rights in rental apartment buildings. However, since Co-op corporations also have a landlord-tenant relationship with their shareholders, many of these changes will significantly affect enforcement of the Cooperative’s rights as well.

1. TP Act Limits on Late Fees; Reduced Recovery of Expenses of Eviction; Longer Time Periods for Evictions.

The TP Act included several provisions focused on rental apartments which will have significant impacts on cooperative corporations:

Late Charges . The TP Act imposed limits on the late fees that can be charged in a lease: the lesser of $50.00 or 5% of rent. Co-ops that charge higher late fees now need to be aware that they can be challenged. Ironically the TP Act does not limit late fees charged by Condominiums or HOA’s.

We recommend that all Co-ops start charging interest at the highest permissible rate under the Proprietary Lease (currently 16% per year unless the lease has a lower rate) from the first date that rent is overdue. Interest may not be considered a “payment, fee or charge” for purposes of rent collections.

No “Additional Rent” Collectable in Summary Proceedings . The TP Act defines “rent” as “the monthly…amount charged…in consideration for the use or occupation of a dwelling…” It specifically excludes any other “fees, charges or penalties” from rent.

Most proprietary leases define maintenance charges (the cost of building operations) as “rent,” and any other amounts due to the Co-op as “additional rent.” Since the TP Act applies to Co-op leases, the result is that a Co-op can no longer include late charges or fines in the total amount sought in summary non-payment proceedings. The Co-op must now start a separate proceeding, such as a collection action in Civil Court. Typical collection actions have significantly higher filing fees and longer wait times for hearings and decisions. It is also questionable whether legal fees can be claimed in a collection action, unless they are allowed under a different section of the Proprietary Lease.

Are legal fees still collectable as part of a summary non-payment proceeding, or are they too now considered a “fee, charge or penalty”? We would argue that they are still collectable in a summary proceeding, since RPL Section 234 specifically states that if a lease allows collection of legal fees in an action or summary proceeding by the landlord, it also impliedly allows collection of legal fees by the tenant. But that issue must still be determined. Moreover, the law also now states that legal fees are not collectable if the landlord obtains a default judgment.

What about discretionary parking or cable charges, gym fees and other charges, i.e., charges that tenants only pay if they use the facility, and that may be itemized separately in a normal maintenance bill? In theory they are not “consideration” for rental of the dwelling, but separate amenities. Therefore a tenant could argue that they too are not recoverable in a summary proceeding.

We recommend that any Co-ops who itemize any building-wide charges separately change that policy, and now include them in a single charge as part of maintenance. It may also be possible that the Co-op’s lien against the shares for any moneys that it is owed – including those that are not collectable in a summary proceeding – allows them to be collected upon resale of the apartment (possibly together with interest.)

Extended Time Periods to Cure Defaults . Most notice and cure periods in summary proceedings have been materially extended, which will further delay collection of arrears. Tenants also now have thirty days to cure defaults even after a determination against them in a summary proceeding (previously it was ten (10) days.)

2. Ban on Escrows for Maintenance Charges?

The TP Act prohibits landlords from demanding more than one month’s rent as a security deposit. Co-ops sometimes require escrows of maintenance charges as a condition of approving purchasers. Prior cases have held that maintenance escrows are security deposits rather than “additional rent.” Therefore, the TP Act would appear to bar cooperatives from continuing the practice of requiring maintenance escrows.

3. Limits on Application Fees Charged by Managing Agents

Yet another section of the TP Act limits the leasing application fees that a landlord can charge to $20.00 . Most managing agents charge purchase application fees ranging up to $750.00. Could the restriction on leasing application fees in the Act be interpreted to apply to purchase application fees, since a purchaser is simultaneously applying for permission to lease the apartment via the Proprietary Lease? Many commentators are taking that position. Although you might think that the restriction does not apply to a managing agent (since the fee goes to the agent, not the Co-op), remember that the managing agent is still the “agent” of the Cooperative, so the fee could well be imputed to the Co-op, as the Agent’s principal.

If these interpretations are upheld, then managing agents will lose a major source of income which they counted on when they quoted a management fee to their clients. They will look to recoup that income through different charges.
Initially, we recommend that the description of the fee should be changed in both the management agreement and purchase application to specify that it is being imposed in connection with the purchase of the shares of the Corporation , not the lease of the Apartment. Longer term, both the Co-op and the Agent should consider other ways to recoup the charges in a manner unrelated to the initial lease of an apartment.

BROADER IMPACTS OF TP ACT ON COOPERATIVES.

Act does not Apply to Condominiums . The TP Act addresses only landlord-tenant relationships. It does not cover condominiums (since the relationship between the Condo and the Unit Owner is not considered a “landlord-tenant” relationship.) Thus one of the significant advantages of cooperatives over condominiums – the ability of cooperatives to maintain summary proceedings to collect arrears in maintenance charges and additional rent due to the Co-op corporation — has largely been eliminated.

Unintended Consequences . We don’t think that the legislature was consciously targeting cooperative corporations when it passed many of the provisions of the TP Act. Notwithstanding, that same ignorance has once again resulted in serious injury to housing cooperatives throughout the state. New York State continues to impose regulations on cooperatives and condominiums without considering their unique characteristics. If you believe that your building will be injured by these new laws, please write to tell your legislator – again – that non-profit Co-op corporations are not the same as for-profit landlords, and that shareholders who comply with their obligations should not have to bear the burdens of protecting the Co-op against shareholders who breach them.

Update on “Prevailing Wage” Bill. The Governor has not yet signed this legislation. If your Association will be affected by having to substantially raise the pay of building service employees who perform work in connection with the maintenance of the building (which includes security guards, possibly even those engaged by a guard service), we urge you to make your opinions known to the Governor immediately. You can contact the Governor’s office by writing to: The Honorable Andrew M. Cuomo, Governor of New York State, State Capitol Building, Albany, NY 12224.