New York’s rental regulations have produced all sorts of weird ways of thinking about real estate. So while a recent court decision doesn’t necessarily improve the city’s housing market in any way, it does at least make a previously implicit result explicit.
The case, as reported by Bloomberg (1), concerned a New York woman who filed for bankruptcy in 2012. A federal judge determined that the value of the lease on her rent-regulated apartment was part of the bankruptcy estate. and, therefore, the lessor could buy the lease from the trustee. The landlord had previously sought to buy out the tenant’s share, which he was not interested in.
The tenant appealed to the Manhattan-based Second Circuit Court of Appeals. The federal appeals court, in turn, asked the New York Court of Appeals (the state’s highest court) to assess whether tenants’ privileges under the rental regulations are assets subject to bankruptcy proceedings.
The state court concluded last November that they are not and that a bankruptcy trustee cannot sell them. This decision was made in the Second Circuit’s ruling last week, which established that “a below-market lease is exempt from creditor claims as a public benefit.” (1)
Think about it. Rent-regulated apartments in New York are owned by private individuals, but the right to live in them is now considered a “public benefit” granted by the state, which has never bothered to pay for what it grants to some of its lucky citizens.
Opponents of New York’s rental rules, which have been on the books in various guises since 1947, have claimed in the past that the rules amount to a taking of private property without compensation. Previously, the State resisted this characterization. But now the state is arguing on public policy grounds that a tenant’s right to lifetime renewal of a rent-stabilized apartment lease, along with the right to pass that lease on to members of the tenant’s household , is in fact a benefit granted by the government. . The state court characterized rent stabilization entitlements as a form of public assistance, and the Second Circuit did the same by characterizing them that way.
This, of course, is what New York property owners have known all along. But in this particular case, the real loser is not the tenant’s landlord, who at least understood the deal when he bought the property and offered it for rent. Despite the argument of the Rent Stabilization Association of New York City Inc., a landlord group that called the state court’s decision a “radical interpretation,” (1) it is actually business as usual for landlords shackled by rental restrictions. rental. The real losers are the tenant’s other creditors, who must absorb a loss due to the tenant’s bankruptcy because the landlord cannot buy out the tenant’s lease and thus indemnify the creditors. In that sense, too, New York provides benefits to tenants at the expense of private individuals: in this case, various creditors.
“Public benefit” thus joins “housing emergency” in the list of phrases that mean something substantially different in the context of New York than in the rest of the country. Rent stabilization may indeed benefit individual members of the public, but the state has no role other than to enforce laws that require private landlords to offer the “public” benefit to tenants. Elected officials love conferring public benefits that don’t require them to raise taxes or pass a budget item.
All of which explains why the rental regulations of 1947 and those that followed remain a political if not a practical necessity. It’s why no one wants to build rental housing for the masses of New York when the state seizes that housing to provide a benefit to renters at the expense of landlords. And it’s why a “housing emergency” that was born out of the Great Depression’s construction slowdown and then the return of World War II veterans to city housing continues to this day.
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1) Bloomberg, “New York City Landlords Can’t Touch Rent-Controlled Flats: Bankruptcy”
