Most New York residents—and certainly most New York attorneys are aware of the Warranty of Habitability. Few may know that its origins are statutory, and fewer still care that it contradicts common law, but most would be surprised by the types of occupancy to which the warranty does and does not apply—and the effect it has on the mortgage foreclosure process. While none of these doctrines are exactly new, they are currently enjoying prominence in the popular and legal press as tenant advocacy groups face a massive upsurge of neglected housing in the wake of the foreclosure pandemic.

When a landlord has lost the ability to pay its mortgage on a building, it fairly predictably stops doing repairs to that building. If tenants seek to have the building maintained through court proceedings, finding a funding source for needed repairs can be challenging. In most cases, an unpaid mortgage and neglected repairs create a self-feeding cycle that virtually guarantees that the tenants will live in escalating squalor until the building itself is, of public necessity, torn down.

While superficially appearing to be a great benefit to tenants, the warranty of habitability found in Real Property Law §235-b, winds up working against tenants and for nobody once this cycle initiates.

Understanding the Cycle

This is how it goes: The landlord, for whatever reason, starts neglecting repairs. This can be for any number of reasons. The landlord may simply be unscrupulous and is seeking to yank as much money out of the building as possible while investing as little as possible. This was a fairly common model in the late 1970s and early 1980s, and led to devastation and blight in areas like the South Bronx. The Bronx was particularly vulnerable due to a number of factors, particularly the construction of the Cross-Bronx Expressway in the 1960s, which destroyed huge swaths of middle-class neighborhoods, rendering previously desirable housing undesirable, thanks to an interstate highway suddenly cutting right through the area, churning out vast amounts of dust and noise. Similar—though less severe—effects were seen in parts of Brooklyn after the earlier construction of the Brooklyn-Queens Expressway.

To some degree, the scars caused to neighborhoods by these mega-highways have faded—especially in those areas well served by the subway system. Many formerly blighted blocks have once again become desirable places to live, and therefore desirable places to invest. However, even as the very desirability of these locations drove the prices of the buildings very high, it set the areas up for trouble—especially as it appeared increasingly easy to build either a cooperative, a condominium, or even a rent-regulated building with the tax breaks associated with the J-51 program.

When the financial systems melted down in 2008, there suddenly appeared on the market a glut of overpriced, over-mortgaged buildings, all with negative equity. Even unregulated buildings became unable to carry their own mortgages because tenants themselves lacked the funds to pay the higher rents. And in regulated buildings, so-called 'preferential rents' wherein a landlord charges significantly less than the law allows, came very much into vogue.

Landlords found themselves simply unable to pay for building repairs, particularly because the building was carrying a mortgage inflated far beyond the building’s recession-adjusted equity. Once the landlord started neglecting repairs, tenants rightly started claiming entitlement to rent abatements for breach of the warranty of habitability. Entitled as the tenants were, this meant that the landlord got still less rent, and became even less able to carry out needed repairs. He certainly could not fund repairs by borrowing more—the building was already over-mortgaged. So neglect of repair led to worsening conditions in the buildings, which led to still lower rents, and so on. Foreclosure became inevitable.

Dangers from Receivers

With an income producing property, one of the earliest steps in the foreclosure process is the appointment of a receiver to collect the income generated by the property and disburse it as needed to preserve the building so it will bring as high a price as possible at at auction near the end of the foreclosure. Simple enough—but one decision, Fourth Federal Savings Bank v. 32-22 Owners Corp., lies like an alligator under the surface of a pond waiting to snap its jaws at any passing prey.

Under Fourth Federal, if a receiver seeks to collect rent where there has been a violation of the warranty of Habitability, not only is the receiver’s claim for rent defeated, but the tenant can procure an order from the receiver’s appointing court during the term of the receivership before the building is sold in the foreclosure sale, in other words—mandating that the foreclosing party pour more money into the building to make the repairs required by both the warranty and the various municipal codes. So long as the foreclosing party does not move for such a receiver, there is no case imposing that kind of 'washback liability.' While this could theoretically discourage the bringing of foreclosure actions in the first place, for foreclosure counsel it should certainly make them think twice about moving for the appointment of a receiver.

Limits of the Warranty

While this outcome is supposed to be tenant-friendly, consider how tenant-hostile it is in actual practice. If there is a receiver, the receiver is as liable on the warranty of habitability as anyone else. If, on the other hand, the tenants start a rent strike under Article 7A of the Real Property Actions and Proceedings Law, the Administrator appointed by the Civil Court is also equally subject to the warranty of habitability. Even if the building is sold for taxes and the building comes under New York City ownership, the city is still bound to the same rigors of the warranty. Even if after the building is sold for taxes, the city sponsors a cooperative apartment corporation and returns the building to private ownership, it does not help the tenants. Cooperative apartment corporations are also bound by the warranty of habitability, even as to their common areas. While condominium units are not directly subject to the warranty, when the city re-privatizes a building, it is always in the form of a cooperative, never a condominium.

Unconventional Washback Liability

In all the scenarios we have discussed, there is no question that the tenant is a tenant; rather it is the 'landlord' who may be somewhat difficult to recognize as such. To this is the sole exception of a condominium owner who is no species of tenant at all, but rather the owner of a dwelling 'in fee simple absolute'—because a condo is the vertical equivalent of owning a single-family home. Yet even for these owners, the warranty of habitability can become an issue. This is because when a condo unit owner rents out their unit to what we often—and mistakenly—call a 'subtenant' but who is in fact a tenant in the full legal sense, the unit owner takes on the landlord side of the warranty of habitability. They become the warrantor, rather than the warrantee.

The situation is somewhat different in a co-op. There, the unit owner normally is considered a tenant. However, if that tenant rents the place out to a subtenant, the unit owner, being out of possession, has no claim to the warranty of habitability, but rather is responsible for the warranty to their subtenant. The unit owner bears the liability to the subletting occupant; the co-op itself has no such liability.

Conclusion

It is easy in all the situations we have discussed to look for villains. Yet there is nothing villainous about an honest tenant wanting decent housing; nothing villainous about a bank wanting its mortgage repaid; nothing villainous about an honest businessperson simply not being able to make a go of it. So without anyone to blame, there is nobody to point to as a logical one to have to pay for the damage. Several decisions have hinted that the only possible solution lies in legislation, but since there is no government agency feeling particularly flush at the moment, whatever the legislative solution would be, it can only reallocate the pain.    

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. Dov Treiman, the landlord-tenant managing partner, contributed to this article.