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Owners go back to stabilization.

Owners go back to stabilization

The shareholders and rent-stabilized tenants of a co-op building are to be treated under rent-stabilization laws, a Manhattan judge ruled after a foreclosure sale canceled both the proprietary and stabilization leases.

Those renters and cooperators who were in default on rental payments or "use and occupancy," and who did not put in a defense, are also being evicted under the ruling. The judge also decided that a $30,000 reserve fund should go to the building owner for repairs.

The foreclosure came about when the converter of the three-brownstone property, at 145-49 East 61st Street, defaulted on a $2.5 million mortgage held by the former owner, Angela De Santis. The sponsor, White Rose Associates, whose principal is Robert J. Ettinger, had also added a $1.5 million wrap to the co-op corporation. The converter was only able to sell seven of the building's 24 units, the remainder of which continued to be occupied by rent-stabilized tenants who were paying far less in rent than the maintenance.

De Santis foreclosed on the property earlier this year and purchased it back at an auction in May for $450,000. She then requested the court to order the eviction of those tenants, both stabilized renters and cooperators, who were not current in their payments.

The Supreme Court judge who decided the case, Judge David B. Saxe, allowed the eviction of those tenants and former co-op owners who defaulted on payment and who put in no defense. Sources said the defaulting co-op owners claimed they did not know what amount to pay the referee after the foreclosure. Alan B. Reiss, the court-appointed receiver in the matter, said: Before this (decision) they were being billed their maintenance. So I don't think that's an issue."

The judge held the eviction in abeyance for those who put in defenses, such as for a breach of the warranty of habit-ability, until the issue could be resolved by a Special Referee.

Edward L. Schiff, the Edwards & Angell partner who represented the co-op corporation which opposed the foreclosure and also represents two of the cooperators, said there was a question as to how the value of "use and occupancy" is determined under these conditions. "It is still unclear and an issue that needs to be addressed by the court," he said.

The court left the amount of the new rent, including that of the purchasers who had not been former tenants, to be decided by the Division of Housing and Community Renewal, which administers the rent laws.

A spokesperson from DHCR stated since this is a recent court case and that the setting of rents can be a complicated issue, that the Office of Rent Administration, working with the Attorney General's office, is examining policy issues in this area. The Office of Rent Administration will have a decision on this in the future.

Not all of the issues are applicable to this case but are expected to arise as other foreclosures take place. For example, was the tenant in possession before conversion or after? Would a non-occupying shareholder receive possession or would the occupying tenant?

Although the Attorney General, Robert Abrams, was not a party to the suit, at the request of Justice Saxe, his office submitted a letter citing both existing case law and public policy in supporting the conclusion that "both shareholders and rental tenants are entitled to remain as rental tenants after a foreclosure."

As evidence, the letter, signed by Assistant Attorney General Loretta Simon, cited among other cases, Apple Bank for Savings, vs. Cartier Apartments, a 1990 Nassau County case, in which Judge Edward G. McCabe ruled that the purchaser at a foreclosure takes title subject to the right of occupants to remain under the Emergency Tenant Protection Act and decided that both the former renters and former cooperators in that case were to become renters.

The New York City Rent Stabilization Law provides that housing accommodations contained in buildings owned as cooperatives are exempt from the Rent Stabilization laws as long as they maintain the status of co-op, Justice Saxe pointed out in his decision on the instant case.

"We would have hoped that he would have ruled that the units were not rent-stabilized or rent-controlled," said John J. Gilbert III, president of the Rent Stabilization Association. "The crucial issue is what the rents will be and to make sure the owner has sufficient income to run the property and hang onto the property." Gilbert said the lawsuit "carved new ground" and as other foreclosures take place, he expects the judges to expand on this case law.

Reis, a partner in Fishbach, Hertan & Reis, was the court appointed receiver in the matter and had attempted to effectuate a workout to no avail. Reis said the judge settled some of the important questions which people had with respect to what happened after a foreclosure, "I don't think there is anything astounding," he said. "Most people thought this is the way it would go, anyway." He called the decision to turn over the reserved fund, to DeSantis, over the co-op corporation's objection, "novel." Reis said the ruling will give some certainty about what will happen it other foreclosure situations, but said "it's a shame it had to got to foreclosure at all." As a receiver, he said, you try to get everybody the best results you can. "Foreclosure is not necessarily the best solution," he said.

"I think it's a carefully thought out case and fair that the judge leaves the rent to the DHCR to decide," said Mary Ann Rothman, executive director of the Council of New York Cooperatives. "One of the criteria, that people retain their status as residents only if they've paid their obligations, is an appropriate means of seeing that housing is maintained."

Confirming in a lawsuit that the shareholders stay on as tenants, Rothman said, will serve as a deterrent to foreclosure. "The banks will know they have to deal with stabilized tenants," she explained. "We have been fortunate in having the cooperation of the banks in averting foreclosures, and this case further strengthens the case of the Attorney General and the whole State of New York with respect to the Resolution Trust Corporation's attempt to evict tenants."

The Attorney General's letter to the court said he is aware of "several hundred financially troubled buildings.

A number of cooperatives are facing the imminent threat of foreclosure due to the sponsor's default on underlying mortgage payments...Families who lose their life savings and ownership rights should not also face loss of shelter because a sponsor has defaulted...Such a result would be unconscionable."
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:foreclosed co-op
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Sep 25, 1991
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