Park East Apartments, Inc. v. 233 East 86th Street Corp.

• Decision Date: 02 May 1988
• Citation: 529 N.Y.S.2d 674,139 Misc.2d 806
• Parties: PARK EAST APARTMENTS, INC., Petitioner-Landlord, v. 233 EAST 86TH STREET CORPORATION, Respondent-Tenant, New York Telephone Co., "John Doe" and "Jane Doe", Respondents-Undertenants.
• Court: New York City Court

Page 674

529 N.Y.S.2d 674

139 Misc.2d 806

PARK EAST APARTMENTS, INC., Petitioner-Landlord, v. 233 EAST 86TH STREET CORPORATION, Respondent-Tenant,

New York Telephone Co., "John Doe" and "Jane Doe",

Respondents-Undertenants.

Civil Court of the City of New York,

New York County, Part 52.

May 2, 1988.

Kent Karlsson, Karlsson & Ng, P.C., New York City, for petitioner-landlord.

Stephen F. Harmon, Parker Chapin Flattau & Klimpl, New York City, for respondent-tenant.

OPINION

LEWIS R. FRIEDMAN, Judge.

This case requires that a state court interpret a federal statute despite what the federal courts in this circuit have done. The statute in question impacts on an area of law which is, and traditionally has been, the bailiwick of the states: regulation of real property is a classic area of local control and legislation. The Condominium and Cooperative Abuse Relief Act of 1980 (15 U.S.C. §§ 3601-3616; the "Act") was adopted to afford limited protection to owners of cooperatives and condominiums from certain abusive practices engaged in by unscrupulous developers. The central issue in this case is whether, under the Act, the long-term lease of commercial store space by a developer to itself prior to the sale of the individual units in a cooperative apartment building may be set aside by residential tenant-cooperators after they gain control of the building.

Procedural History of this Proceeding

In accordance with an offering plan filed with the Attorney General of the State of New York, the property was conveyed by the developer, 233 East 86th Street Corporation (the "Tenant"), to the petitioner here, a corporation formed for the purpose of cooperative ownership. At the closing, petitioner, under the developer's complete control, executed a lease for the store-front space in the building with Tenant, the respondent here (the "Lease"). The Lease permits any lawful use, allows subleasing, and assignment, and provides for an annual rental of $5,000, with increases only for increased costs of certain building expenses, for the life of the Lease; if all the renewal options are exercised, the Lease will ultimately expire in 2078, after 95 years. The store space is currently subleased to the respondent undertenant for $60,000; the rent will increase to $75,000 per year. The offering plan (at pp. 1, 18, 77) accurately described the 95-year Lease and the potential application of the Act.

Within two years of the original closing, the shareholders of petitioner, in conformity with the procedures under the Act, voted to terminate the Lease. The votes in favor were more than two-thirds of the units other than those owned by the sponsor. On September 20, 1985 petitioner served a notice to terminate the Lease effective November 19, 1985. Respondents unsuccessfully sought injunctive relief ( 233 East 86th St. Corp. v. Park East Apartments, 131 Misc.2d 242, 499 N.Y.S.2d 853). Supreme Court found plaintiff-tenant had not shown that there was a likelihood of success on the merits, irreparable harm, or a favorable balance of the equities; the court concluded that an injunction should not issue. On appeal the Appellate Division, First Department, affirmed, without opinion, but noted: "[w]e need not reach the question of the applicability of the statute (Condominium and Cooperative Abuse Relief Act [15 U.S.C. § 3601 et seq.].)" (123 A.D.2d 536, 506 N.Y.S.2d 658).

Petitioner then commenced the instant holdover proceeding. Respondents moved to dismiss for failure to state a cause of action; that motion was granted on petitioner's default. The instant motion originally sought to vacate that default. The court advised the parties that the issues were sufficiently important that the minor default should not stand. The parties were advised that the court would determine the merits of the motion and that it might treat the extensive affidavits submitted as though this were a motion for summary judgment (CPLR 3212[c] ). The parties submitted additional papers.

As a threshold matter, petitioner argues that this court is bound by Supreme Court's conclusion, in deciding the motion for a preliminary injunction, that respondents are not likely to succeed on the merits; therefore, it contends that the motion to dismiss should be denied without plenary consideration. The law in New York is settled that denial of a motion for a preliminary injunction has no effect on the merits of a case. The decision does not "constitute the law of the case or an adjudication on the merits"; also, it does not act as collateral estoppel or res judicata in a subsequent action ( Walker Memorial Baptist Church v. Saunders, 285 N.Y. 462, 474, 35 N.E.2d 42; Ratner v. Fountains Clove Road Apts., 118 A.D.2d 843, 500 N.Y.S.2d 329; Ryger v. Segal, 129 Misc.2d 763, 764, 494 N.Y.S.2d 617). That result is particularly appropriate here. The Appellate Division specifically expressed reservation as to the application of the Act to this case. It would be erroneous to give conclusive effect to Supreme Court's dictum that respondent had no likelihood of success on the merits, which relies on its conclusion that the Act applies, where the premise has been disavowed on appeal. Simply put, the conclusion by Supreme Court that the equities did not require that this proceeding be enjoined, which is all that was affirmed, does not preclude this court from determining the merits of the present motion. In any event, the decision in ( West 14th St. Commercial Corp. v. 5 West 14th Owners Corp., 815 F.2d 188 [2d Cir.1987] cert. denied 484 U.S. 871, 108 S.Ct. 200, 98 L.Ed.2d 151), after the decisions in the injunction case, warrants this court's consideration of the merits.

The Provisions of the Act

Congress found that in conversions of property to cooperative and condominium forms of ownership "certain long-term leasing arrangements for recreation and other condominium- or cooperative-related facilities which have been used in the formation of cooperative and condominium projects may be unconscionable" (15 U.S.C. § 3601[a][3] ); the Act was adopted "to assure [that] fair and equitable principles are followed in the establishment of condominium and cooperative opportunities, and to provide appropriate relief where long-term leases of recreation and other cooperative- and condominium-related facilities are determined to be unconscionable" (15 U.S.C. § 3601[b] ). Concern over abuses in the conversion process convinced Congress, after extensive hearings, to exercise its Commerce Clause power to legislate in an area of local concern on the grounds that conversions affect the national housing market ( Bay Colony Condominium Owners Assoc. v. Origer, 586 F.Supp. 30, 32-33 [N.D.Ill.1984]; cf. Hodel v. Virginia Surface Mining & Reclamation Assoc., 452 U.S. 264, 276, 101 S.Ct. 2352, 2360, 69 L.Ed.2d 1 [1981]; National League of Cities v. Usery, 426 U.S. 833, 840, 96 S.Ct. 2465, 2469, 49 L.Ed.2d 245 [1976] ). The scheme adopted in the Act was a compromise between the Senate, which sought an extensive federal presence and substantive regulation, and the House, which favored no regulation at all.

Two interrelated sections, 3608 and 3607, govern self-dealing contracts and leases which may be terminated by the purchasers when they gain control of a cooperative or condominium development. Although the sections have been discussed in the Supreme Court injunction action and the Second Circuit decision in West 14th St. Commercial Corp. v. 5 West 14th Owners Corp., supra, neither case adequately investigated their legislative history. A description of each of those sections is required to put them in context.

In Section 3608(a) Congress declared that certain long-term "leases" of property to a cooperative or condominium might be found to be "unconscionable at the time they were made." A "lease" is defined in the Act:

" 'Lease' includes any agreement * * * containing a condominium or cooperative unit owner's obligation, individually, collectively, or through an association to make payments for a leasehold interest or for other rights to use or possess real estate, or personal property (which rights may include the right to receive services with respect to such real estate or personal property) * * * " (15 U.S.C. § 3603[16] ).

Thus the section applies only to leases of real or personal property to the cooperative or condominium. The court, on the application of the unit owners, determines the invalidity of a lease which meets certain criteria, including that it was made when the developer controlled the project, was for more than 21 years, contains an automatic rent increase clause, and "was entered into prior to June 4, 1975" (15 U.S.C. § 3608[a][6] ). The section provides for a presumption of unconscionability if certain elements, such as excessive rents and automatic rent increases, are present. The court can, however, consider contrary evidence and grant appropriate remedial relief including rescission, reformation, restitution and damages (15 U.S.C. § 3608[c], [d] ).

The history of Section 3608 shows the problems it was to address. The Administration had drafted legislative proposals for cooperative and condominium reform in 1979. The primary bill was § 612. Section 3608 was proposed, in essentially its current form, as an amendment (Amendment 114) to § 612 offered in 1979 by Florida Senators Stone and Chiles based on problems in Florida (see Remarks of Sen Williams, Chair of the Senate Subcommittee, 126 Cong.Rec. 4230 [daily ed. Feb. 28, 1980]; see also Remarks of Sen. Williams, 126 Cong. Rec. 28173 et seq. [daily ed. Sept. 30, 1980]; cf. Point East Mgt. Corp. v. Point East One Condominium Corp., 282 So.2d 628 [Fla.1973]; Wechsler v. Goldman, 214 So.2d 741, 744 [Fla.App.1968] ). In the bill adopted by the Senate (S 2719), the section (then section 510 of the bill) was both retroactive and prospective in operation and included provisions precluding enforcement of automatic increase clauses in...