251 CPW Hous. LLC v. Pastreich

124 A.D.3d 401

1 N.Y.S.3d 32

In re 251 CPW HOUSING LLC, Petitioner–Respondent,

v.Yitzhak "James" PASTREICH, Respondent–Appellant,Jane Doe, et al., Respondents.

Supreme Court, Appellate Division, First Department, New York.

Jan. 6, 2015.

Barry J. Yellen, New York, for appellant.

Cozen O'Connor, New York (Menachem J. Kastner of counsel), for respondent.

MAZZARELLI, J.P., RENWICK, ANDRIAS, RICHTER, FEINMAN, JJ.

Order of the Appellate Term of the Supreme Court, First Department, entered on or about December 6, 2012, which, in this summary holdover proceeding, reversed an order of the Civil Court, New York County (John H. Stanley, J.), entered on or about June 6, 2011, granting respondent tenant's motion for attorneys' fees incurred in this and related proceedings and directing a hearing to determine the amount of such fees, and denied respondent tenant's motion, unanimously modified, on the law, to grant respondent tenant's motion with respect to attorneys' fees incurred in this proceeding only, and to remand the matter to Civil Court for a hearing to determine the amount of the fees, and otherwise affirmed, without costs.

In August 1991, petitioner 251 CPW Housing LLC's (the landlord) predecessor-in-interest and respondent Yitzhak "James" Pastreich (the tenant) entered into a rent-stabilized lease reciting a monthly rent of $5,747.52. The lease contained a rider which, inter alia, provided for a preferential rent of $3,000 per month on the condition that the tenant accept the apartment in "as is" condition. The rider further provided that at the end of the term of the initial preferential lease, the tenant had the option to renew with a new monthly preferential rent of $3,000 adjusted by the corresponding rent guidelines. The parties thereafter executed five lease renewals, each for a two-year term. The rent charged in the renewals was based on the original $3,000 preferential rent, plus the applicable rent guideline increases. The fifth renewal lease, commencing June 1, 2002, had a preferential rent of $3,715.64.

In 2004, the landlord offered the tenant a renewal lease with no preferential amount stated; instead, the lease set forth the legal rent amount of $7,652.26. The landlord contends that a 2003 change in the Rent Stabilization Law allowed it to discontinue the preferential rent. The tenant, believing that he was entitled to a preferential rent for the duration of his tenancy, refused to execute this lease. In November 2004, the tenant filed a rent overcharge complaint with the New York State Division of Housing and Community Renewal (DHCR). On May 27, 2005, DHCR denied the overcharge complaint without conducting a hearing. The tenant thereafter filed a Petition for Administrative Review (PAR), which was denied on December 14, 2005.

Meanwhile, in January 2005, while the DHCR proceeding was pending, the landlord commenced this summary holdover proceeding in the Housing Part of Civil Court (Housing Court) raising the same issues. On May 9, 2005, Housing Court denied the landlord's motion for summary judgment, finding triable issues of fact as to whether the parties intended the preferential rent to continue for the duration of the tenancy. The landlord moved to renew and reargue, and on August 26, 2005, Housing Court stayed the motion and marked the holdover proceeding off-calendar pending conclusion of the DHCR proceedings.

After the PAR was denied, the tenant brought a CPLR article 78 proceeding alleging that DHCR acted in an arbitrary and capricious manner by failing to conduct an evidentiary hearing. Supreme Court dismissed the proceeding and the tenant appealed to this Court. On April 10, 2008, this Court reversed (Matter of Pastreich v. New York State Div. of Hous. & Community Renewal, 50 A.D.3d 384, 856 N.Y.S.2d 61 [1st Dept.2008] ). The Court rejected DHCR's reliance on 9 NYCRR 2521.2(a), which gives landlords the option, once a preferential rent is charged, of offering a lease renewal based on either the preferential rent or the legal regulated rent ( 50 A.D.3d at 386, 856 N.Y.S.2d 61 ). The Court found that "[t]hat provision was not intended to obviate the terms of a lease agreement where both the landlord and the tenant are aware that the rent charged could legally be higher, but agree, under a specific set of circumstances, to allow the tenant to pay less, either for a specified period of time or for the duration of the tenancy" (id. ). Finding that the 1991 preferential lease controlled, and that the parties' intent could not be unequivocally determined from that agreement ( id. at 387, 856 N.Y.S.2d 61 ), the Court remanded to DHCR for a hearing on the parties' intent concerning the duration of the preferential rent ( id. at 385, 856 N.Y.S.2d 61 ).

Upon remand, a DHCR administrative law judge (ALJ) conducted a hearing and took testimony from the landlord's representatives and the tenant. Based on that testimony, the language contained in the 1991 preferential lease, and the conduct of the parties in renewing the lease five times based on the preferential rent, the ALJ concluded that the landlord and the tenant intended and agreed, at the time the 1991 preferential lease was executed, that the preferential rent would endure for the duration of the tenancy. The record does not reflect that the landlord sought further review of the ALJ's decision.

The tenant then moved in the Housing Court proceeding for an award of legal fees on the ground that, as the prevailing party, he was entitled to such fees pursuant to the terms of the lease and Real Property Law § 234. The tenant sought fees incurred in the holdover, DHCR and article 78 proceedings. Housing Court granted the tenant's motion, and restored the matter to the calendar for a hearing on the amount of the legal fees. The Appellate Term reversed Housing Court's order and denied the tenant's motion for attorneys' fees, finding that when the holdover proceeding was commenced, the landlord's possessory claim was "of colorable merit" ( 37 Misc.3d 138[A], 2012 N.Y. Slip Op. 52208[U], *1, 2012 WL 6051948 [App.Term, 1st Dept.2012] ). The Court noted that, in any event, the tenant would not be entitled to recover attorneys' fees incurred in connection with the related DHCR and article 78 proceedings (id. at *2). The tenant appealed and we now modify.

Under Real Property Law § 234, when a residential lease provides for a landlord's recovery of attorneys' fees resulting from a tenant's failure to perform a lease covenant, a reciprocal covenant is implied requiring the landlord to pay the tenant's attorneys' fees incurred as a result of, inter alia, the tenant's successful defense of an action or summary proceeding commenced by the landlord arising out of the lease (see Graham Ct. Owner's Corp. v. Taylor, 115 A.D.3d 50, 55, 978 N.Y.S.2d 213 [1st Dept.2014] ). To support an award of attorneys' fees, the tenant must be the prevailing party, that is, the result must be substantially favorable to the tenant (see Walentas v. Johnes, 257 A.D.2d 352, 354, 683 N.Y.S.2d 56 [1st Dept.1999], lv. dismissed 93 N.Y.2d 958, 694 N.Y.S.2d 635, 716 N.E.2d 700 [1999] ).

Here, the terms of the parties' lease plainly triggers the reciprocal covenant mandated by Real Property Law § 234, and the tenant is entitled to recover the attorneys' fees incurred in his successful defense of the holdover proceeding. Contrary to the landlord's assertion, the tenant was the prevailing party regardless of whether the holdover proceeding was formally dismissed, since a tenant is entitled to recover fees "when the ultimate outcome is in his favor, whether or not such outcome is on the merits" ( Centennial Restorations Co. v. Wyatt, 248 A.D.2d 193, 669 N.Y.S.2d 585 [1st Dept.1998] [internal quotation marks omitted] ).

Despite the tenant's status as the prevailing party, the Appellate Term nevertheless denied the fee request because, in its view, the landlord's possessory claim was "of colorable merit" ( 2012 N.Y. Slip Op. 52208 [U], *1). This was an improper standard. "The overriding purpose of [ Real Property Law § 234 ] is to provide a level playing field between landlords and tenants, creating a mutual obligation that provides an incentive to resolve disputes quickly and without undue expense" ( Marsh v. 300 W. 106th St. Corp., 95 A.D.3d 560, 560, 943 N.Y.S.2d 525 [1st Dept.2012] [internal quotation marks omitted] ). Because it is a remedial statute, Real Property Law § 234 "should be accorded its broadest protective meaning consistent with legislative intent" (id. [internal quotation marks omitted] ). The Appellate Term's conclusion that a tenant's claim to reciprocal attorneys' fees can be denied whenever a landlord asserts a colorable claim undermines the salutary purpose of Real Property Law § 234. A "colorable claim" standard would result in the gutting of the protections afforded by the statute because it would allow courts to deny fees whenever the landlord can make a nonfrivolous legal argument in support of its position.

Although courts have some discretion to deny attorneys' fees sought under Real Property Law § 234, such discretion should be exercised sparingly.¹ Thus, a request for attorneys' fees should be denied only where a fee award would be manifestly unfair or where the successful party engaged in bad faith (see Jacreg Realty Corp. v. Barnes, 284 A.D.2d 280, 280, 727 N.Y.S.2d 103 [1st Dept.2001] ; 245 Realty Assoc. v. Sussis, 243 A.D.2d 29, 35, 673 N.Y.S.2d 635 [1st Dept.1998] ; Grossman v. Homenny, 22 Misc.3d 139[A], 2009 N.Y. Slip Op. 50365[U], 2009 WL 562848 [App.Term, 1st Dept.2009] ; 67 E. 2nd St., Inc. v. Cejas, 14 Misc.3d 139[A], 2007 N.Y. Slip Op. 50300[U], 2007 WL 581903 [App.Term, 1st Dept.2007] ).

Here, the landlord has made no showing of any bad faith on the tenant's part. Nor, under the circumstances, would it be manifestly unfair to award the tenant attorneys' fees in the holdover proceeding. The landlord argues that at the time it commenced that proceeding,...