Tenant Loses Apartment Over Market-Rate Rentals
Andrew Denney, New York Law Journal
September 16, 2015
See decision below.
A tenant illegally profited from her rent-stabilized apartment by renting rooms to more than 100 guests through AirBnB at 2 1/2 times her monthly rent and jeopardized the security of fellow tenants by giving her guests the access code for her building, a Housing Court judge ruled.
Writing in 335-7 LLC v. Steele, 77007/11, Manhattan Housing Court Judge Phyllis Saxe awarded on Aug. 6 a final judgment of possession against Tracy Steele, who rented a three-bedroom apartment at 337 West 14th Street, located in the West Village.
Steele moved into the apartment in 1995 and previously had roommates, but they eventually moved out. She testified that she could not afford to pay the $2,693-per-month rent by herself, so, in October 2009, she listed the apartment on AirBnB to bring in "temporary roommates," she said.
Steele charged her guests $215 per night with a $76 cleaning fee. In August 2011, another woman moved into the apartment, with whom Steele split the rent.
Citing a 1985 decision by the Appellate Division, Second Department, in Continental Towers v. Freuman, 128 Misc.2d 680, Saxe wrote that "commercial exploitation" of apartments by tenants who sublet them at market rate "threatens the integrity of the rent stabilization scheme" and unfairly deprives the landlord of making the same profits.
Steele argued that her guests were roommates, and thus the landlord had no basis to terminate her lease. But citing a 2014 Manhattan Supreme Court decision in Brookford v. Penraat, 159605/14 (NYLJ, Dec. 23, 2014), Saxe wrote that Steele's charges were hotel guests, noting that she provided them with fresh linens and food.
Steele was represented by Brian Kimmel of the Kimmel Law Firm and her landlord was represented by Todd Rose of Rose & Rose.
335-7 LLC, Petitioner-Landlord v. Tracy Steele 337 West 14th Street Apartment 71 New York, New York, 10014
Respondent-Tenant John Doe and Jane Doe Respondents-Undertenants,
September 11, 2015
Cite as: 335-7 LLC v. Steele, 77007/2011, NYLJ 1202736933498, at *1 (Civ., NY, Decided August 6, 2015)
Decided: August 6, 2015
The issue for the Court to resolve in this holdover proceeding is whether Respondent-tenant ("Tracy Steele") should lose possession of her three-bedroom rent-stabilized apartment ("Apartment 71") after renting it to nearly one-hundred (100) people from countries around the world, none of whom stayed longer than ten days.
Petitioner, 335-7 LLC, is the landlord and owner of the building located at 337 West 14th Street, New York, New York 10014. Petitioner and Ms. Steele entered into a written lease agreement (the "Lease") on or about April 1, 1995. The Lease term was subsequently renewed, the most recent, prior to service of the Termination Notice, was from May 1, 2011 to April 30, 2013. On June 28, 2011, Petitioner served Ms. Steele with a Notice of Termination and on July 29, 2011 Respondent was served with the instant Holdover Petition.
The Notice of Termination states in pertinent part that Respondent engaged in wrongful conduct pursuant to §2525.6(b) of the Rent Stabilization Code. Specifically, that Respondent used the internet to advertise short-term rentals of the premises at rates starting at $215 per night. The Notice of Termination further states that the monthly legal regulated rent for the apartment is $2,693.08, (or $89.50 a night) and that Respondent "commercialized the subject premises and [utilized] the subject premises for illegal profit-making, short-term rentals at rates far in excess of any proportionate share of the legal regulated rent for the subject premises."
Respondent, retained counsel, interposed an answer dated September 20, 2011 in which she denied the essential allegations of the Petition, and asserted seven (7) affirmative defenses and one counterclaim for attorney's fees.
On October 20, 2011, Petitioner moved for pre-trial discovery, use and occupancy, and to strike the fourth through seventh affirmative defenses. Respondent cross-moved for dismissal based on Petitioner's failure to serve a notice to cure. On April 10, 2012, Judge Schreiber denied Petitioner's motion for use and occupancy, granted limited discovery, struck the fourth through seventh affirmative defenses and noted that the issue of the failure to serve a notice to cure would depend on whether Respondent violated the illegal sublet provisions of the Rent Stabilization Code, which should be decided after trial. After discovery, Petitioner moved for summary judgment, which was denied on October 17, 2014 and affirmed on June 9, 2014.
Testimony and Documents in Evidence
Adam Nagin, the managing agent for the Building, testified on behalf of Petitioner. He stated that in or around January 2011, he became aware of complaints from other tenants that strangers with suitcases, many of whom looked like European tourists, were coming and going from Steele's apartment. Mr. Nagin learned from the superintendent that a housekeeper was coming to the subject apartment on a weekly basis. After speaking with the superintendent, Mr. Nagin discovered an advertisement posted on the Airbnb website by Respondent that contained her picture and pictures of an apartment that he recognized to be Apartment 71. Mr. Nagin further testified that he spoke to Ms. Steele about renting out her apartment to tourists and that she completely "blew him off", telling him that he didn't have a clue as what was going on in his building.
Mike Hickey, an insurance broker testified in support of Petitioner. He testified that insuring a Class A multiple dwelling is less expensive than insuring a hotel. The insurance premiums for a residential apartment building is based on the number of units whereas the insurance premiums for hotels or transient apartments is based on turnover, i.e., on the number of persons staying in a given unit in a given period of time and the fact that there is a much greater risk for injury, death, and damage from fires, as well as crime such as theft, loss of property, and other similar casualties. Mr. Hickey testified that if a residential apartment is used in a nonconforming manner, like a hotel, the insurer might disclaim coverage for the incident, leaving the building owner without insurance coverage for the premises.
Tracy Steele testified that she moved into this three bedroom apartment in the West Village in or about 1995. She explained that she initially had other roommates living with her in this apartment but that over time they had moved on. She could not afford to pay the $2,693.08 by herself so in October, 2009 she decided to seek "roommates" through the Airbnb website. She advertised the apartment on the Airbnb website as a "Village Vintage 2 Bdrm." Her profile on Airbnb comprised photographs of the space along with a photograph of herself. It touted appealing features including its close proximity to the subway and a nightly rate of $215 with amenities such as bedding, towels, cable television, wireless internet, and the use of an elevator to access the laundry room in the basement. Respondent also required a cleaning fee of $76.00 on top of the nightly rate. In addition, she featured quotes from former satisfied guests who had stayed in the apartment. Respondent communicated with Airbnb and guests through her email address firstname.lastname@example.org.
Respondent testified that she began using the Airbnb website when a friend of hers, Cheryl Brajge, was unable to move in as planned. Concerned that she would not be able to pay the rent, Respondent resorted to renting her apartment through Airbnb. Throughout her testimony respondent insisted on referring to her guests as "temporary roommates." She explained that the idea of using Airbnb came after having met the founder of Airbnb, Brian Chesney, at a networking event in 2009.
Respondent testified that after a reservation was confirmed, Airbnb issued a transaction confirmation along with a "Host Checklist" to remind her to confirm arrival times, provide fresh sheets and pillowcases, clean the house and bathroom, fill the refrigerator with breakfast food, and give the guest an itinerary. After the guests arrived, Airbnb deducted its fee and paid Respondent. The money was deposited into a checking account for these business transactions.
Respondent provided Airbnb with her social security number and she received a 1099 tax reflecting the income received from renting out the premises. Respondent's income tax returns for 2009 and 2010 were entered into evidence. Her 2010 Schedule E filed with her tax return reflected business deductions from her income from renting out the apartment such as toiletries and shampoos, the cost of cleaning the apartment and utilities. She also deducted $120 for laundry, $100 for insurance, and $468 as "management fees."
On this issue, it bears noting that during most of the trial Respondent resisted compliance with the judicial subpoena for the production of her tax returns until the last day of trial when she finally produced them revealing the business rental income from Airbnb. Respondent also admitted on cross-examination that some transactions were not documented or processed through with Airbnb as she negotiated them in cash and avoided paying the airbnb's transaction fees. Therefore, its difficult to know how many more guests actually stayed in Steele's apartment.
Petitioner admitted into evidence, email communications between Steele and guests such as this one with Julie:
Julie: Yes! I just sent an email to the other two girls to get the final okay (one of them was looking at another place in W. Village that was $275/nt.-but I like the looks of yours best, so I am pushing for it…I should get the final okay in the next couple of hours…
Steele: I can do $275 and waive the cleaning fee if that helps make your decision…
Julie: Alright, the new price did help make the decision! They've given their okay to book it. How do we do it with the new price? [Petitioner's Exhibit-31]
There was this one with "Petr":
we are three couples, are going, are going to arrive in New York at 3rd May2010 and leave it 6th May 2010. And we are lookin for 3 bedroom apartments on this dates? Do you have something for us on this dates? Thank you and waiting for your reply.
And this one between her and "Santiago" from the Dominican Republic:
Hello tracy, I am a civil engineer from Dominican republic, I am traveling to New York with my friend Jesus E Payano, who is a US citizen. We will be in new york for 2 days in personal stuff. We'd like to be guested in this apartment because is near the sites we will have to be at.
And Pete, who wanted to rent Steele's apartment so that he could spend a long weekend in the New York City with his four friends:
There are four of us spending a long weekend in New York following a trip to Orlando the week before. We have friends staying at the Martime Hotel, which I guess isn't too far from your apartment.
We're a mature group (40+), and rest assured we'd show the utmost respect for your apartment and property.
There were also "customer reviews" submitted into evidence like the following:
I spent ten days in Tracy's place with two coworkers on a work trip from Seattle and had a blast. Staying in her apartment is so much more relaxing than staying in a hotel and her space was close to everything that I like…[Petitioner's exhibit-12]
We had a perfect stay in Tracy's app. A perfect location, near the subway & fast in thecentre of New York, enough space for 6 adults, perfect internet connection, very quiet [sic] in the building, and the apt. very original decorated. GREAT! We'll come back. Greetings from Belgium [Petitioner's exhibit-19].
These email communications, Airbnb transaction lists, and "customer reviews" were not disputed by Steele. They show that Ms. Steele rented to people who visited from all around world including the United States, Italy, Australia, United Kingdom, Ireland, Dominican Republic, Israel, Spain, Belgium, Serbia, and Estonia, to name just a few.
Respondent's current roommate, Erika Del Priore, testified for Steele. She stated that she moved into the apartment on August 1, 2011 where she continues to live. She stated testified that since August 2011 she and Respondent share the apartment and split the rent but that at times houseguests of hers have rented out the third bedroom. Her testimony was not helpful to Ms. Steele.
Commercial exploitation of an apartment and concomitant profiteering threatens "[t]he integrity of the rent stabilization scheme [which] is obviously undermined if tenants, who themselves are the beneficiaries of regulated rentals, are free to sublease their apartments at market levels and thereby collect the profits which are denied the main landlord" (Continental Towers v. Freuman, 128 Misc.2d 680 [App. Term 1st Dept. 1985]). Thus, tenants are prohibited from engaging in the type of subletting activity which is characterized by financial gain, as it unfairly deprives the landlord of collecting the same profits. Another reason to prohibit illegal subletting relates to the issue of security. Steele's actions jeopardized the security of the building and the safety of the other tenants when she gave out the access code to the front door. Steele's actions also prevented the landlord from investigating the backgrounds of these guests, as the landlord testified that he does for all prospective tenants on a regular basis. This is especially important to the building owner who bears the ultimate legal responsibility for third party criminal activity and maintaining the building in a safe manner. When Steele repeatedly gave away the access code to the front door of the subject premises to these subtenants, she created serious security problems in the building.
Illegal subletting is prohibited by Rent Stabilization Code §2525.6(b) which states in pertinent part:
(b) "The rental charged to the subtenant by the tenant shall not exceed the legal regulated rent plus no more than a ten percent surcharge payable to the tenant if the housing accommodation is sublet fully furnished. Where a tenant violates the provisions of this subdivision (b), the subtenant shall be entitled to treble damages."
Rent Stabilization Code §2524.3(h) states the following in pertinent part:
(h) "In the event of a sublet, an owner may terminate the tenancy of the tenant if the tenant is found to have violated the provisions of section 2525.6 of this Title."
Thus Rent Stabilization Code §2524.3(h) authorizes a landlord to terminate a lease and tenancy if the tenant has overcharged a subtenant more than the legal regulated rent plus no more than ten percent if the apartment is fully furnished.
Respondent argues that she did not illegally sublet. She claims that these guests were roommates and even if she overcharged these roommates the landlord still had no basis to terminate her lease. (see First Hudson Capital LLC. v. Seaborn 54 A.D.3d. 251 (1st Dept. 2008). Respondent points to §235-f(3) of the Real Property Law, which provides that:
3. "Any lease or rental agreement for residential premises entered into by one tenant shall be construed to permit occupancy by the tenant, immediate family of the tenant, one additional occupant, and dependent children of the occupant provided that the tenant or the tenant's spouse occupies the premises as his primary residence.'
What precisely characterizes a roommate was at issue in Peck v. Lodge, 2003 WL 26094731 (SupCt., NY Co., 2003) in which the Court defined a roommate as a "long term co-occupant of the apartment with the lease-holder, with whom she/he shares the entire living area.
More recently, the Court, in Brookford LLC v. Penraat, 2014 WL 7201736 (SupCt. NY Co. 2014), found that a hotel guest as someone who:
"….stays [for] less than 30 days…Defendant provides all of the items commonly provided by a typical hotel and other useful amenities to facilitate a visitor or tourists' stay in New York City: fresh linens and towels, complimentary soap, shampoo, a hair dryer, an iron, a dolly, WI_FI and a map of information on local entertainment venues. Similar to a hotel, defendant charges her Guests either a nightly or weekly rate, and a fee for additional persons staying in a room; maintains rules for check-in and checkout procedures; requires Guests to make a reservation; and provides Guests with a reservation numbers
As these cases are applied to these facts it is evident that Ms. Steele's guests were not roommates-they were her hotel guests. She logged in their arrival and departure times, provided fresh sheets and pillowcases, provided maid service, cleaned and stocked the refrigerator with breakfast food such as orange juice, fruit, and bagels, and printed out the guest's itinerary. She was engaged in short term rentals of her apartment for money!
These facts are remarkably similar to West 148 LLC v. Yonke, 11 Misc. 3d 40, 812 N.Y.S.2d 735, 2006 N.Y. Slip Op 26083 (App. Term, 1st Dept. 2014). In Yonke, the Appellate Term upheld the eviction of a rent regulated tenant who rented out the apartment to short term guests. Respondent called her apartment "Chez Sylvie. Bed and Breakfast" and listed "Chez Sylvie" on internet websites, including "1800roommates.com" under the category of "Affordable Hotels". Respondent also listed the building and its address, the weekly rate of $250 (including breakfast), along with other amenities.
Like the tenant in Yonke, Ms. Steele advertised her apartment on the internet, created a profile for the Airbnb website, described the premises as a "Village Vintage 2 Bdrm" and communicated through her email address email@example.com. Steel rented it out for $215 a night with was nearly two and a half (2 ½) times what she was paying the landlord. The fact that she did not rent it out every night of the year is hardly a defense.
Respondent's testimony demonstrated a complete disregard of Petitioner's legitimate concern that she was engaged in hoteling. Her attempt to garner sympathy from the court by claiming that she resorted to using Airbnb to "cover [her] nut" until she could find a dependable and permanent roommate," was not persuasive. She was completely oblivious to the problems that her hoteling was causing the landlord and her neighbors the most serious of which is that fact she gave the front security code to nearly a hundred strangers who the landlord never knew. Moreover, Respondents utter disregard for the safety of her neighbors is further evidenced when she continued to rent out the apartment even after being served with the instant Notice of Termination.
Finally, Respondent claims that Petitioner's failure to serve a notice to cure prior to the Notice of Termination requires that the Petition be dismissed as per the first affirmative defense. Because the court finds that Ms. Steele has illegally sublet her apartment service of a notice to cure is not required. In so holding the court relies on the recent case of 220 West 93rd Street LLC. v. Stavrolakes, 33 A.D. 3d 491 (1st Dept. 2006) where the First Department held that the tenants profiteering and commercialization of the apartment constituted an incurable violation of the rent control laws. In the more recent case of 51 West 86t6h Street Associates LLC. v. Fontana, 28 Misc. 3d 140(a) (App. Term 1ST Dept. 2010), the Appellate Term held that where the tenant subleased the rent-stabilized apartment without the landlord's approval and engaged in profiteering the landlord was not required to serve a notice to cure.
Respondent also argues that even if the rent stabilization law does not require service the notice to cure, Paragraph 17 of the Lease requires it. In pertinent part it states that:
"You default under the Lease if You Act in any of the following ways:
(a) You fail to carry out any agreement or provision of this Lease
(b) You or another occupant of the Apartment behaves in an objectionable manner…
If You default in any of these ways, other than a default in the agreement to pay rent, Owner may serve You with a written notice to stop or correct the specified default within 10 days. You must then either stop or correct the default within 10 days and continue to do all that is necessary to correct the default as soon as possible. (emphasis added).
While Respondent correctly maintains that sometimes lease provisions that provide greater protections than the statutes should be adhered to, this lease provision does not require the landlord to provide the tenant with a notice to cure. The language of the lease states that the owner "may" serve Respondent with written notice. Thus, the language of the lease did not require Petitioner to serve Ms. Steele with the notice to cure. Accordingly, the holdover petition does not require a Notice to Cure to be served.
Petitioner, 335-7 LLC, is awarded a final judgment of possession against Respondent Tracy Steele and the Respondent-Undertenants John Doe and Jane Doe. Warrant to issue forthwith, execution stayed through September 4, 2015.
Date: August 6, 2015
New York, New York